South Korea's composite leading indicator (CLI) compiled by the Organisation for Economic Co-operation and Development rose for a 19th straight month in August, reaching the highest level in the world. The reading signals that the country's gross domestic product over the next six to nine months is likely to run well above its long-term trend, with growth also exceeding the trend rate.
Still, the pace of the increase has been slowing since March, and with international oil prices and government bond yields surging on factors such as the escalating conflict in the Middle East, some question whether the expansion is losing momentum.
From Near the Bottom to First Place in a Year
South Korea's CLI stood at 102.87 last month, the highest since May 2021 (102.88), or five years and three months, according to the OECD on the 13th. The OECD's CLI is designed to detect turning points in the business cycle early and is used to gauge economic conditions six to nine months ahead. A reading above the 100 baseline suggests GDP will exceed its long-term trend, while a reading below 100 points to the opposite.
South Korea's CLI fell through January last year (99.14) before rebounding in February, and crossed above 100 in November last year at 100.12. August's level ranked first among the 17 countries the OECD publishes. It is the first time South Korea has held the top spot since May 2020 (99.46), a span of six years and three months.
As recently as September last year, the country ranked 16th of 17, near the bottom. It then climbed sharply, entering third place in February this year and overtaking Mexico for second in July. Last month it passed Brazil, which had held first place for eight months, to reclaim the top position.
The cyclical component of the leading index compiled by the National Data Agency shows a similar trend. It rose for nine consecutive months to 104.2 in July, the highest since August 2000 (104.6), a span of 25 years and 11 months.
The OECD CLI is built from six components: the manufacturing business outlook, share prices, inventories of capital goods, the inventory-to-shipment ratio, the spread between short- and long-term interest rates, and the terms of trade. Improved terms of trade on the back of a semiconductor boom is cited as a main driver of South Korea's index. Terms of trade measure export prices divided by import prices. Exports last month rose 68.7% from a year earlier, lifted by expanded shipments of semiconductors, computers and cosmetics.
Gains Narrow for Fifth Month: "Peak Is Near" vs. "It's Because the Level Is High"
The concern is that these forward-looking gauges are decelerating. The month-on-month gain in South Korea's OECD CLI peaked at 0.43 point in March, then narrowed for five straight months: 0.41 point in April, 0.37 point in May, 0.28 point in June, 0.15 point in July and 0.06 point last month. The month-on-month change in the National Data Agency's cyclical component also shrank to 0.4 point in July from 0.9 point in June.
External headwinds are piling up. International oil prices have topped $100 a barrel as the conflict in the Middle East intensifies. Concerns about U.S. inflation have sharply raised the odds of a rate increase by the Federal Reserve, and U.S. Treasury yields have surged. Domestic bond yields followed. The three-year Korea Treasury bond yield rose above 4% on the 11th, breaking that level for the first time since November 2023. The 10-year yield hit its highest since October 2022.
The Bank of Korea has also raised its base rate twice in a row, raising the prospect of heavier funding costs for companies and interest burdens for households. Taken together, these developments have fueled concern that the pace of expansion will gradually slow and eventually give way to a downturn.
The government, however, argues that the significance lies in the elevated level of the leading index itself, and that reading the narrowing gains as a signal of contraction is not warranted. In the September edition of its "Recent Economic Trends" report, known as the Green Book, released this month, the Ministry of Finance and Economy said the economy "appears to be maintaining a solid recovery."
"Whether measured by the OECD or by the National Data Agency, the leading index is at a very high level, overwhelmingly ahead of major countries," a ministry official said. "With the index well above 100, a slower month-on-month gain should not be read as the economy turning down." The official added: "Because the index has settled at a high level, it is more appropriate to read this as the current sound and solid growth trend continuing."
On rising oil prices and U.S. Treasury yields, the official said, "External uncertainty has clearly widened, but there is a time lag before it feeds through to the real economy," adding, "We will closely watch the widening uncertainty."
