🚨 Leading Economic Index Rises 23 Months Straight
Today Korean Economic News for Beginners | 2025.10.15
0️⃣ But Real Economy Still Stagnant, Construction Slump Holds It Back
📌 'Indicator Decoupling' Deepens - Leading Index Rises While Coincident Index Doesn't Move
💬 According to Statistics Korea, the September leading economic index rose 0.3% from the previous month, staying above the baseline of 100 for 23 consecutive months. The leading index cycle fluctuation recorded 101.2, continuing the economic expansion phase. However, the coincident index showing the current economic state remains at 98.7, staying below 100 for the 15th month, indicating delayed actual economic recovery. Experts point out that severe struggles in the construction sector and global uncertainties are blocking real economic recovery. Especially, while construction orders are increasing, they are not leading to actual construction starts and completion due to financing problems and permit delays, negatively affecting jobs and domestic demand. The Korea Development Institute (KDI) emphasized that "the prolonged gap between leading and coincident indices signals structural factors at work" and "harmonious operation of fiscal and monetary policies is needed."
1️⃣ Simple Explanation
Economic indicators say the future is bright, but the economy we actually feel is still dark. This strange situation has continued for nearly 2 years, and the biggest problem is that the construction industry is not moving.
First, let's explain what 'leading index' and 'coincident index' are. The leading index is an indicator that predicts future economic conditions in advance. Like weather forecasting, it tells us whether the economy will get better or worse. This indicator includes elements like the stock market, construction orders, and imports/exports.
On the other hand, the coincident index shows what the economy is like 'right now at this moment'. It consists of current data such as how much factories are producing, how much people are consuming, and how many jobs are growing.
In normal situations, the leading index rises first, and the coincident index follows a few months later. It's like planting seeds (leading index) and sprouts coming up after time passes (coincident index). But now, the leading index has been above 100 for 23 months saying 'the economy will get better', while the coincident index has been below 100 for 15 months saying 'the economy is bad'.
This phenomenon where two indicators move in opposite directions is called 'decoupling'. Why is this happening? The biggest reason is the construction sector. Construction orders are increasing. This means many construction contracts are being signed. This is what's pushing up the leading index.
But the problem is that contracts are signed but actual construction work doesn't start. As the real estate market froze, project financing (PF) became difficult. Also, various permit procedures are delayed and environmental regulations are strengthened, postponing construction starts.
Let me give an example. Suppose a construction company contracted to build 1,000 apartments. This contract becomes a positive factor for the leading index. But if the actual work of digging the ground and raising buildings doesn't start, no jobs are created, materials aren't sold, and the nearby area's economy doesn't revive. This is why the coincident index doesn't rise.
The construction sector plays a very important role in the economy. More than 2 million workers are directly employed, and there are countless related industries such as cement, steel, electricity, and equipment. When construction stops, all these industries suffer.
The bigger problem is that this situation has lasted a long time. Usually, when the leading index rises first, the coincident index follows about 3-6 months later. But now, this gap has continued for nearly 2 years. This signals not just a time lag problem but a structural problem.
Global uncertainties also play a role. US-China conflicts, Middle East disputes, and raw material price volatility make companies hesitate in investment decisions. Also, with interest rates still high, it's difficult to borrow and expand business.
The government is trying to boost the economy by increasing fiscal spending, but the Bank of Korea is maintaining high interest rates due to inflation concerns. Fiscal policy and monetary policy are looking in different directions, halving the effect.
In the end, indicators say things will get better, but the actual economy is still difficult because construction isn't moving, policies are mixed, and uncertainty is high.
2️⃣ Economic Terms
📕 Leading Economic Index
The leading economic index is a comprehensive indicator for predicting how the economy will be in the future.
- It consists of elements that hint at future economic trends such as construction orders, imports/exports, stock market, and consumer sentiment.
- If it's higher than the baseline of 100, it's judged as an economic expansion phase; if lower, a contraction phase.
- It tends to move 3-6 months ahead of the actual economy, making it important reference material for policy decisions.
📕 Coincident Economic Index
The coincident economic index is an indicator showing the current ongoing economic state in real-time.
- It consists of elements reflecting current economic activity levels such as industrial production, retail sales, and employment.
- Based on 100, above means economic expansion, below means contraction state.
- Unlike the leading index, it measures what the economy is actually like 'right now'.
📕 Decoupling
Decoupling is a phenomenon where two indicators or economic factors that originally moved together move in opposite directions.
- Normally, when the leading index rises, the coincident index follows a few months later.
- However, if the gap between the two indicators persists long-term, it's interpreted as a signal of structural problems.
- In the current Korean economy, the decoupling of leading and coincident indices has continued for nearly 2 years.
📕 Construction Completion
Construction completion is an indicator showing the scale of actually completed construction work in monetary terms.
- If construction orders mean 'contracts', construction completion means 'actually completed work'.
- Currently, construction orders are increasing but completions are not, so it's not leading to actual economic recovery.
- Construction completion must increase for jobs to be created, material demand to grow, and regional economies to revive.
📕 Project Financing (PF)
Project financing is a financial method of raising funds using future profits from large-scale construction projects as collateral.
- Unlike regular loans, it uses the project's own cash flow as repayment source.
- When real estate conditions worsen, PF financing becomes difficult, causing construction projects to stop or be delayed.
- Many construction projects are currently delayed due to PF problems, blocking economic recovery.
3️⃣ Principles and Economic Outlook
✅ Normal Relationship Between Leading and Coincident Indices
Let's understand how the two indicators work and why the current gap occurs.
First, the leading index reflects expectations and plans. Elements included in the leading index are mostly results of decisions toward the future. For example, construction orders are plans to "build this building in the future," and export contracts are promises to "sell these goods later." The stock market also reflects investors' future expectations. Therefore, a rising leading index means companies and investors view the future positively.
Second, the coincident index reflects reality and execution. The coincident index measures 'this very moment' when factories actually operate, people buy things, and jobs are created. Unlike plans, execution takes time and may face various obstacles. If funding is insufficient, regulations are strict, or market conditions worsen, planned activities cannot be executed.
Third, normally the leading index moves first and the coincident index follows. Looking at past data, the coincident index typically turned upward 3-6 months on average after the leading index turned upward. This is the natural time lag for plans to move to execution. However, a gap continuing for nearly 2 years as now is abnormal, signaling major obstacles between planning and execution.
The current long-term decoupling suggests structural problems, not just a time lag issue.
✅ Why Construction Struggles Block Economic Recovery
Let's analyze why the construction industry isn't moving and how this affects the entire economy.
First, construction plays an 'amplifier' role in the economy. The construction industry itself is large, but more important is its ripple effect. Suppose building one apartment complex. Dozens of materials are needed: cement, steel, glass, wires, pipes, tiles, paint, etc. Also, numerous workers are invested: designers, builders, electricians, plumbers, interior companies, etc. Moreover, restaurants, accommodations, and convenience stores around construction sites are activated. It's estimated that when construction completion increases by 1 trillion won, an additional 2-3 trillion won of demand occurs in related industries.
Second, project financing problems are preventing construction starts. During the 2021-2022 real estate overheating period, many construction and financial companies aggressively pursued PF. However, as the real estate market rapidly cooled afterward, sales became difficult and business viability worsened. Financial companies are reluctant about new PF due to concerns about additional losses, and extending maturity of existing projects has become difficult. As a result, even when construction orders are signed, cases where construction starts are delayed due to inability to secure actual construction funds are occurring frequently. According to the Korea Construction Industry Research Institute, about 30 trillion won worth of construction projects are currently delayed due to financing problems.
Third, regulations and permit delays also play a role. Environmental impact assessment periods have increased due to strengthened environmental regulations, and local government permit reviews have become stricter. Also, construction starts are often postponed due to resident opposition or complaints. As these procedural delays accumulate, the time from order to construction start has increased from 6-9 months in the past to 12-18 months now. No substantial economic activity occurs during this period.
Because construction stoppage blocks the entire economy's circulation due to structural characteristics, the perceived economy isn't improving.
✅ Lack of Policy Coordination Delays Recovery
Let's look at the situation where fiscal and monetary policies work separately, halving economic stimulus effects.
First, it's a contradictory situation where fiscal policy loosens while monetary policy tightens. The government is increasing fiscal spending to boost the economy. It's expanding public infrastructure investment, operating small and medium enterprise support programs, and providing various tax benefits. However, the Bank of Korea is maintaining high base rates due to inflation concerns. When interest rates are high, borrowing costs rise, making companies hesitate to invest, and households prefer saving over consumption. Even as the government releases money on one side, the central bank recovers it on the other, so the overall effect is limited.
Second, policy signal inconsistency increases confusion in the private sector. Companies and households make decisions based on government and central bank policy directions. However, fiscal policy says "we must revive the economy," while monetary policy says "it's not time to relax yet." These conflicting signals increase uncertainty for economic agents. High uncertainty makes them postpone investment and consumption, further delaying economic recovery.
Third, overall improvement is needed rather than selective support. If government fiscal spending concentrates only on specific areas, ripple effects to the entire economy are limited. For example, even if only public construction projects increase, if private construction doesn't revive, the entire construction ecosystem is difficult to recover. Also, large company-focused support doesn't reach small and medium enterprises and self-employed people. For economic recovery to be felt, improvement across industries and classes is needed, but current policies aren't producing such broad effects.
Fiscal and monetary policy harmony, and clear signal provision to the private sector are key to economic recovery.
✅ Future Outlook and Needed Policy Direction
Let's forecast how long the current situation will last and what policies are needed.
First, in the short term, decoupling is likely to continue. Construction PF problems are difficult to solve quickly. It's expected to take at least 1-2 years for the real estate market to regain stability and for financial companies' risk-avoidance tendencies to ease. Also, global uncertainties won't be easily resolved. Therefore, even if the leading index continues gradual rise, the coincident index is likely to fully recover only after mid-2026.
Second, construction sector normalization is the top priority. The government must prepare comprehensive measures to solve PF insolvency problems. Ways are needed to inject public funds to partially relieve financial companies' burdens and supply liquidity to sound projects. Also, permit procedures must be simplified and balance found between environmental regulations and development. Construction must normalize for jobs to increase, domestic demand to revive, and related industries to recover.
Third, coordination of fiscal and monetary policies is essential. The Bank of Korea should actively consider interest rate cuts when inflation shows stability. If interest rate cuts happen, companies' investment burdens decrease, and households' interest burdens ease, creating consumption capacity. Economic stimulus effects are maximized when fiscal spending expansion and interest rate cuts occur simultaneously. Also, mechanisms for the government and central bank to regularly communicate and coordinate policy directions must be strengthened.
Construction normalization, policy coordination, and uncertainty resolution are keys to raising the coincident index and improving the perceived economy.
4️⃣ In Conclusion
The leading economic index has continued rising for 23 months, but the coincident index showing the actual economy is still struggling. This long-term decoupling suggests structural problems rather than just a time lag issue, with construction sector struggles identified as the biggest cause.
The leading index reflects expectations and plans for the future. Growing construction orders, increasing export contracts, and rising stock markets are clearly positive signals. However, if these plans don't move to actual action, they don't lead to economic recovery.
The biggest obstacle now is the construction industry. While construction orders increase, financing is blocked due to project financing problems, and actual economic activity isn't happening as construction starts are postponed due to various regulations and permit delays. Because construction plays an amplifier role in the economy, when this sector stops, the entire economy's circulation is blocked.
There are also problems on the policy side. The government is trying to boost the economy by increasing fiscal spending, but the Bank of Korea is working in the opposite direction by maintaining high interest rates. As fiscal and monetary policies work separately, policy effects are halved, and conflicting signals only increase confusion in the private sector.
For the economy to actually recover in the future, several conditions must be met. First, construction PF problems must be solved and liquidity supplied to sound projects. Second, fiscal and monetary policies must harmonize and send consistent signals. Third, unnecessary regulations must be eased and permit procedures simplified.
In the short term, decoupling is likely to continue. However, if the government and central bank actively cooperate and work on construction sector normalization, the coincident index could turn to recovery around mid-2026.
In the end, true economic recovery requires reality, not indicators, to improve. Policy efforts to turn plans and expectations into execution and results are urgently needed at this time.
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