NABO Economic Trends & Issues (Issue No. 57)
July 20, 2017
Economic Policy Analysis Division of the Economic Analysis Office
I. Economic Trends
The Korean economy continues to expand, mainly on the strength of exports and investment, but the momentum shows signs of declining due to falling production and consumption. Exports have been especially strong, rising at double-digit rates year-on-year for six consecutive months, and the strength in exports has spurred higher capital expenditures. However, production growth in every industry declined in both April and May, and the average capacity utilization rate remained extremely low. The recent spike in the Consumer Confidence Index did not lead to an increase in consumption as hoped, and retail sales decreased in May.
Ⅱ. Impact of Rising US Interest Rates on the Financial Soundness of Korean Households
As the US Federal Reserve is set to normalize its monetary policy, the market interest rates of Korea and the US returned to a growth trend. If the US market interest rate hikes cause Korean market interest rates to follow suit, the domestic macroprudential risks will, all else being equal, increase in the short term due to the higher household debt service ratios. Nevertheless, demand for credit in Korea may not necessarily become overheated in the mid-to-long term. Policy should be carefully crafted to mitigate the shock of an interest rate rise driven by external factors and to secure macro and micro financial stability.
Ⅲ. Self-Employment and Key Characteristics
There were 5.54 million self-employed workers as of the first quarter of 2017, and the number has been ratcheting up since the third quarter in 2016. Most self-employed workers in Korea have no other employees and are heavily concentrated in hospitality, food and beverage, and real estate rental business. Most of them are experiencing declines in revenues or decelerating revenue growth, and a majority of the most recently self-employed are in their 60s or older. Ways must be found to maximize their chances of success, specifically by protecting their business foundation and livelihood, and by raising their competitiveness by executing measures that duly take into account the nature of their businesses.
Ⅳ. Financial Institutions' Recent Fund Management Behavior and its Implications
As Korean financial institutions focus on diversifying their investment assets including foreign assets, domestic corporate credit ratings are declining, which in turn is restraining money supply growth. A combination of weak money supply growth, rising long-term corporate debt, and increases in interest rates may temporarily cause a spike in interest rates, suggesting that more prudence should be exercised in monetary policy.