NABO Economic Trends & Issues (Issue No. 65)
I. Economic Trends
The Korean economy has recently been experiencing a continued increase in exports as well as plant and equipment investment, while production and consumption are also making a recovery. Although the export growth rate was subdued in February due to temporary reasons such as fewer business days and the base effect, the daily average export volume continues to increase while plant and equipment investment continues to flow steadily backed by strong exports. Overall industrial production rebounded due to strong exports and the base effect of the previous months’ drawbacks, while retail sales staged a rebound led by durable goods. Consumer prices in February increased by 1.4%, higher than the previous month, as agricultural and fishery product prices rose due to the cold weather. The Korean Won-to-Dollar exchange rate increased due to increased volatility in the global financial market, while treasury bond interest rates continued to rise, affected by the raised interest rates of US Treasury Bonds.
Ⅱ. The Impact of the Won-Dollar Exchange Rate Fluctuation on the Real Economy and Inflation in Korea
The Won-Dollar exchange rate has been steadily decreasing since the second half of 2016, and recently dropped below the long-term average level which had been maintained since the Asian Financial Crisis. It was found that fluctuations of the Won-Dollar exchange rate in an open economy such as that of Korea, have a relevant impact on plant and equipment investment as well as on private consumption, through changes in trade conditions and real purchasing power. The increase of the real exchange rate (depreciation of the value of the Won), is suggested to affect the decline in plant and equipment investment as well as private consumption through price increases of imported goods. Exports and imports are likely to be more affected by real economic factors overseas such as the global economic growth rate and external trade volume, rather than exchange rate factors. In addition, it is suggested that Won-Dollar exchange rate fluctuation is one of the factors that determines domestic consumer prices, and that the recent drop in the exchange rate has led to lower consumer prices.
Ⅲ. Analysis of the Relation between Changes in the Economic Cycle and Changes in Employment Trends by Age Group
As the working population is rapidly aging, the proportion of youths and young adults in their 30s in the economically active population is decreasing while the proportion of middle-to-senior-aged people at least 50 years old is rapidly increasing. Also, as the rate of participation of youths and 60+ seniors in economic activity has increased since the financial crisis, the unemployment rate of these age groups has also been steadily increasing.
Upon running a simulation on the changing level of employment by age group according to changes in the economic cycle, it is suggested that 60+ seniors and youths react sensitively to economic cycles. When the real GDP increases by 1%p, it is suggested that the number of 60+ seniors and youths employed would increase by over 0.48%p and 0.35%p (for a combined increase of 0.21%p) respectively in the same quarter. However, it appears that the relationship between economic cycles and employment or unemployment rates became significantly weaker in some age groups (those in their 30s and those of the age 60 or above), whereas the relationship becomes somewhat stronger for youths and those in their 50s. This is probably due to structural factors as the baby boomers enter a new age group, as well as government policy on increasing the quantity of jobs specifically for vulnerable age groups.