Buoyed by January’s stock-market boom, leading indicators that foreshadow the economy posted their largest gain in 16 years since the global financial crisis. However, actual on-the-ground production turned downward for the first time in three months amid production adjustments in key items such as semiconductors, revealing a temperature gap between indicators. In particular, with the war between the United States and Iran amplifying external uncertainty, there are growing concerns that even expectations for an economic recovery could quickly freeze.

According to the “January Industrial Activity Trends” released on the 4th by the Ministry of Data and Statistics, the cyclical component of the leading composite index stood at 102.3 in January, up 0.7 points from the previous month. This is the biggest increase in 16 years and 7 months since June 2009 (0.8 points), right after the global financial crisis.

The leading composite index is calculated by aggregating seven key indicators that move ahead of the business cycle, such as construction orders and financial indicators. The “cyclical component of the leading composite index,” which excludes trend movements, plays a decisive role in forecasting the economy’s direction.

The backdrop to the surge in the leading index was the stock market. An official at the Ministry of Data and Statistics explained, “The recent steep rise in the KOSPI contributed the most to lifting the index.” Improvement in the export-import price ratio, which shows how much foreign goods can be purchased with the money earned from selling goods, also helped push up the cyclical component.

However, the cyclical component of the coincident composite index, which reflects current economic conditions, came in at 99.0, unchanged from the previous month. Compared with the leading index’s biggest jump in 16 years, the real economy’s recovery pace is falling short of market expectations.

In fact, the all-industry production index (2020=100) fell 1.3% month-on-month to 114.7 in January. The main drag on production was semiconductors. While manufacturing output increased in electronic components (6.5%), it declined 1.9% from the previous month as production of semiconductors (-4.4%) and other transport equipment such as oil tankers and container ships (-17.8%) fell.

Lee Doo-won, Director for Economic Trend Statistics Review at the Ministry of Data and Statistics, said, “Export values increased due to higher semiconductor prices, but volume-based growth was limited,” adding, “It appears that year-end production adjustments by companies had an effect.” He explained that the decline in other transport equipment reflected a base effect from increased shipbuilding volumes at the end of last year.

Construction completed (constant prices), a measure of builders’ actual work performed, plunged 11.3%. It was the steepest decline in 14 years since January 2012 (-13.6%). Contrary to the government’s expectation that the construction economy would recover this year, weakness is persisting. Last month, the Korea Development Institute (KDI) also said, “Due to the sluggish provincial real estate market, orders are not translating into actual construction,” sharply lowering its forecast for this year’s construction investment growth from 2.2% to 0.5%.

On top of this, the outbreak of war between the United States and Iran has created a further headwind of external uncertainty. South Korea sources about 70% of its crude oil imports and about 20% of its LNG from the Middle East. Most of these volumes pass through the Strait of Hormuz, where oil producers such as Iran and Saudi Arabia are concentrated.

The Hyundai Research Institute projected the previous day that, “If airstrikes drag on and the Strait of Hormuz is blockaded for several months, the average annual oil price could surge to around $100 per barrel,” and that, “In that case, this year’s economic growth rate would fall by 0.3 percentage points, while consumer price inflation would rise by 1.1 percentage points.”