Business sentiment falls for first time in 3 months in June, dragged down by base effect

By Kim Byeo-ri, The Herald Business

Business sentiment fell for the first time in three months in June, led by a pullback in the non-manufacturing sector. A base effect from the arts, sports and leisure industries — which had benefited from holiday-season demand in May — was a major factor.

The composite business sentiment index (CBSI) for all industries stood at 97.7 in June, down 1.2 points from the previous month, according to the Bank of Korea's June business survey and economic sentiment index (ESI) released Thursday. The CBSI had risen in April and May before reversing course.

The CBSI measures how businesses perceive current economic conditions. It is calculated using key sub-indexes from the business survey index (BSI) — five for manufacturing and four for non-manufacturing. A reading above 100 indicates conditions are more optimistic than the long-term average; a reading below 100 signals pessimism.

"The decline was broadly centered on non-manufacturing industries, particularly construction and arts, sports and leisure," said Lee Heung-hu, head of the Bank of Korea's economic sentiment survey team. "The base effect was especially pronounced in arts, leisure, sports and service businesses, as well as accommodation providers, which had seen a boost from the Family Month holidays in May."

By sector, manufacturing rose 0.4 points from the previous month to 101.2, driven by gains in financial conditions (+0.4 points) and new orders (+0.2 points). That is the highest reading since August 2022 (102.9), nearly three years and 10 months ago. Lee said three consecutive months of improvement in manufacturing earnings — and the index holding above the long-term average of 100 for two straight months since May — was an encouraging sign.

Non-manufacturing, by contrast, fell 2.1 points to 95.4, weighed down by declines in sales (-0.9 points) and profitability (-0.9 points).

A divergence emerged by company size. The CBSI for large companies rose 1.1 points to 104.5, the highest since May 2022 (109), while the index for small and medium-sized enterprises fell 0.5 points to 95.7. By business type, export-oriented firms rose 1.1 points to 106.4, while domestic-demand firms fell 0.4 points to 98.

Lee attributed the gap to strong IT product exports. "Large companies and exporters improved this month on the back of robust IT exports, but small and medium-sized enterprises and domestic-demand firms declined," he said. "They have yet to reach the long-term average, but the trend of easing weakness that began around early 2025 is continuing." He added that as supply chain disruptions ease and export-led growth spreads to the domestic side, sentiment among smaller firms and domestic-demand businesses should gradually improve.

Looking at the underlying BSI data, manufacturing earnings in June were lifted by strong results from semiconductor and component makers, with new orders and business conditions in the electronics, video and communications equipment segment improving by 9 points and 7 points, respectively. Petroleum refining and coke also saw gains in new orders (+18 points) and financial conditions (+14 points), supported by expanding demand from downstream chemical industries and lower oil prices. The automotive sector improved, led by parts makers, with production and new orders rising 5 points and 4 points, respectively.

In non-manufacturing, the construction sector's business conditions index fell 9 points and profitability dropped 3 points, hurt by a decline in new orders for plant and telecommunications infrastructure projects and rising construction material prices. Arts, sports and leisure saw profitability and sales fall 27 points and 22 points, respectively, due to the base effect from the previous month's holidays and rising facility maintenance costs. Transportation and warehousing also deteriorated, with financial conditions falling 4 points as domestic transport service providers reported weaker earnings and higher operating costs.

The CBSI outlook for next month came in at 95.2, down 2.4 points from the current month's reading. Both manufacturing and non-manufacturing sectors pointed lower — manufacturing fell 2.1 points to 98.2, while non-manufacturing dropped 2.7 points to 93.2.

In manufacturing, the expected declines were concentrated in chemicals and chemical products, other machinery and equipment, and fabricated metals. In non-manufacturing, construction, transportation and warehousing, and information and communications led the projected drop.

Meanwhile, the economic sentiment index (ESI) — a composite of the BSI and the consumer sentiment index — fell 0.7 points from the previous month to 96.8 in June. The cyclical component held steady at 95.1, unchanged from May.