Business sentiment among South Korea's largest companies deteriorated as tensions in the Middle East escalated again and global interest rate hikes gathered pace.
The Federation of Korean Industries said on the 28th that its October Business Survey Index, based on a poll of the country's 600 largest companies by revenue, came in at 98.6. That marks a decline of 3.4 points from 102 this month, turning negative after just one month.
A reading above 100 means companies expect business conditions to improve, while a figure below 100 signals a negative outlook. The index stood at 98.6 in June, 98 in July and 89.9 last month before turning positive at 102 in September, only to fall back below 100 a month later.
The federation attributed the shift to a prolonged conflict between the United States and Iran, which has again worsened conditions in the Middle East and raised raw material costs for domestic companies. It also cited growing prospects of interest rate increases in major economies, starting with the United States, as dampening corporate sentiment.
Manufacturing was hit particularly hard, with next month's index at 95.6, down sharply from 101.7 this month. Six sectors including pharmaceuticals, food and beverages, textiles and petroleum weakened on the end of holiday demand, higher oil prices and oversupply, with exceptions such as electronics and telecommunications equipment, which includes semiconductors. The index for petroleum refining and chemicals deteriorated markedly to 85.2 for next month from 92 this month.
Non-manufacturing posted a reading of 101.8 for next month, above the 100 threshold, helped by easing import price pressures and expectations of stronger domestic demand. Still, that was slightly lower than 102.4 this month, and some sectors including construction at 95.3 remained below 100.
By category, domestic demand at 101.4 and employment at 100.3 were positive, while companies took a negative view of exports at 99.7, investment at 97.4, profitability at 97.7, funding conditions at 98.3 and inventories at 102.9. The recent appreciation of the won drove the divergence between the export and domestic demand readings. The export index turned negative for the first time in five months as exporters braced for weaker earnings, while the domestic demand index benefited from lower prices for imported materials and components and reduced foreign currency settlement costs. The employment index, meanwhile, turned positive for the first time in four years and one month, since September 2022.
"There are concerns that weak corporate sentiment will persist due to instability in raw material prices from renewed Middle East tensions and moves toward higher global interest rates," said Lee Sang-ho, head of the federation's economic policy division. "We need to promote domestic industrial production by expanding the scope of the tax credit for domestic manufacturing, and to improve corporate sentiment by supporting labor exemptions such as introducing a white-collar exemption within mega special zones or extending the settlement period for flexible working hours."
