NABO Economic Trends & Issues (Issue No. 51)
January 25, 2017
Economic Policy Analysis Division of the Economic Analysis Office
I. Economic Trends
In the Korean economy, the slowdown of exports has recently subsided with a turnaround in manufacturing and investments. Consumption continues to decline along with slow employment growth, leaving consumer sentiment and employment in the manufacturing sector low.
Ⅱ. Review of the Direction of Fiscal Management in Response to the 2017 Economic Contraction
Korean economic growth is forecasted to remain at or above 2% due to the contraction in domestic demand, but counter-cyclical abilities are expected to decrease in consideration of fiscal soundness and budget cutbacks in the economic sector in areas such as industry, SMEs, energy and SOC. Although various policy measures need to be reviewed for finances to play a counter-cyclical role, it should be remembered that an early implementation of budgets and supplementary budgets bring about certain effects along with limitations.
Ⅲ. Stocktaking of the Financial Stability of Korea and Emerging Economies Following US Interest Rate Increases
The financial instability of emerging economies is being highlighted as the US Federal Reserve has shifted toward a contractionary monetary policy. An analysis of the current account balance and external debt repayment capacity of Korea and major emerging markets has revealed that a number of emerging economies have weak financial stability. The monitoring of various risk factors needs to be strengthened against the rise in US interest rates, and risk management measures should also be developed. In addition, methods to mitigate negative impacts need to be found in relation to concerns about potential risks posed by household debt, marginal firms and investment contraction that may result from an increase in domestic interest rates following the interest rates rises in the US.
Ⅳ. Background and Forecast for the Recent Rise in International Oil Prices
International oil prices have shown a steady increase entering 2016 after a reduction of excess supply volume, and rebounded to surpass 50 dollars (a barrel) after the OPEC agreement to cut production. International oil prices in 2017 are expected to increase within a limited range due to lower crude oil supply and increased demand. In the medium-to-long term, higher supply elasticity and structural changes in the energy market are expected to lead to a decline in supply, resulting in a low possibility of oil price spikes.
Ⅴ. Key Outcomes of Future Population Projection (2015~2065) and Implications on Economic Policy
According to the Future Population Projection newly made in 2016, a downward adjustment was made to the growth rate of adolescents whereas the senior population and the number of international migrants increased, resulting in a small increase in gross population and working age population. Given the upward adjustment of population growth rates and working age population as well as changes in the population structure forecast such as a higher proportion of seniors as opposed to the decline in the adolescent population estimate, economic policies need to be fine-tuned in areas such as domestic demand, employment, pension and welfare budget allocations for seniors.
Ⅵ. Key Issues Regarding National Finances Among Discussions about the Constitutional Amendment
The National Assembly has recently created a Special Committee for a Constitutional Amendment, under which discussions on the topic are being held. Some of the key issues surrounding the fiscal subjects under discussion in the constitutional amendment include the introduction of a legal effect on budgets, independence of the general accounting office, lifting restrictions against the National Assembly’s budget adjustment rights, introduction of fiscal working rules
and developing constitutional grounds for funding and contribution fees. Matters that were proposed under a consensus by the advisory committee in 2009 and 2014 require discussion on concrete measures to act on, while conflicting issues need to be thoroughly analyzed to highlight their respective benefits and weaknesses.