NABO Economic Trends & Issues (Issue No. 55)
May 22, 2017
Economic Policy Analysis Division of the Economic Analysis Office
I. Economic trends
The Korean economy has been showing signs of moderate recovery, supported by buoyant exports and investment that have offset flaccid consumption growth. Amid a pick-up in the global economy, exports and capex have posted robust growth rates with continued expansion of construction investment. However, private consumption remains subdued despite the recovery of consumer sentiment, due to limited gains in household income and growing household debt, combined with other consumption-related setbacks.
Ⅱ. Equilibrium real exchange rate: estimation & relationship with current account balance
Following the US decision to keep Korea on its watch list for currency manipulation, NABO assessed the impact of the foreign exchange rate on the current account balance: it estimated the equilibrium real exchange rate to define the undervaluation/overvaluation range of the currency, and analyzed export and current account balance trends in each of the ranges. As a result, it was found that the notable expansion of the current account surplus since the fourth quarter of 2012 was primarily attributable to structural factors related to domestic consumption, rather than the foreign exchange rate. Thus, it is necessary to address the current account surplus by boosting consumption and exports, which would require efforts to tackle structural dynamics stifling consumption, instead of making artificial adjustments to the foreign exchange rate.
Ⅲ. A possible shift in the European Central Bank (ECB)’s monetary stance
Since the 2008 financial crisis, ECB has adopted an accommodative monetary policy, i.e. keeping the policy rate low and making bulk purchases of treasury bonds, which seems to have protected financial institutions from a liquidity squeeze and thus contributed to the financial stability of the Eurozone. If the real economy in Europe continues its winning streak, ECB may consider a shift from its current monetary stance, for example by scaling back its quantitative easing policies. However, there are lingering obstacles for such a shift, such as aging populations and hefty fiscal deficits in vulnerable Eurozone countries.
Ⅳ. The fintech industry and policy trends
Fintech refers to not only the incorporation of ICT within financial services for enhanced convenience, but also the convergence of innovative digital technology and finance with the aim of changing the financial landscape. The increase in online transactions and the growing use of ICT in the financial sector has set the stage for the advancement of the fintech business. However, the fintech industry, dominated by start-ups, has not witnessed any significant progress yet, due mainly to doubts about the protection and security of personal information, and the regulatory environment serving as a hindrance to industry entry by new start-ups.