NABO Economic Trends & Issues (Issue No. 67)
I. Economic Trends
The Korean economy has recently maintained a gradual recovery led by the continued improvement in consumption, despite the weakening manufacturing production and deteriorating investment. In March, production in the manufacturing sector decreased significantly, particularly in terms of automobile and shipbuilding; and the manufacturing average operation ratio fell to its lowest level since March 2009. The Consumer Price Index in April increased from the previous year to 1.6%, mainly due to price increases in agricultural and fisheries products as well as industrial goods. Due to the relaxed geo-political risks on the Korean peninsula, the won-to-dollar ratio declined in April to 1,067.8 won per dollar. Treasury bond interest rates (3-year maturity) decreased due to concerns about the trade dispute between the US and China at the beginning of the month, but have rebounded since the middle of the month as US Treasury Bond interest rates have risen.
Ⅱ. Analysis of the Characteristics of the Recent Japanese Economy
Although Japanese economy maintained a long-term low-growth and low-inflation trend since the bursting of the economic bubble, the economic policy pursued by the Abe administration starting in 2013 resulted in an increase in corporate operating profits and a revitalized labor market. However, due to the weak increase in wages and stagnant household incomes, consumer spending is unable to grow and the inflation rate is also below the central bank’s target level. Even though corporate earnings increased and the employment situation has improved, the rate of wage increases is so low that the virtuous circle created between income and the recovery of consumption has not been able to take place. Thus, in order for the Japanese economy to experience a virtuous cycle and reach its target inflation level, it needs to be backed by wage increases through higher expected inflation and increased productivity. Given that Korea is facing similar issues as the Japanese economy, economic players must be prevented from lowering their inflation expectations and boost the economy’s potential growth rate through increased productivity.
Ⅲ. Analysis of the Reasons behind the Growth Imbalance between Household and Corporate Incomes and the Resultant Implications
Since 1995, while Korea’s annual gross national income (GNI) has increased by 6.6% on average, the annual increase rates of household income and corporate income were 6.0% and 8.1%, respectively, resulting in a growth imbalance between household and corporate incomes. While most OECD member economies experience the issue of relatively low-growth rates in household income, the income gap in Korea (2.1%p) is wider than the OECD average (0.7%p). According to the analysis, this is because the proportion of operating surpluses and interest income of self-employed businesses has dropped by a relatively large amount in Korean households. The analysis highlighted that the gap in the income growth rates of households and corporations was due to 1) a continued decrease in the proportion of household salary and wages among the added value created by companies; 2) a sudden drop in operating surplus increase rates in traditional self-employed businesses, which were above 10% in the 1990s but dropped to just over 1% since the 2000s; and 3) a reduction in net asset income as the volume of household debts excessively exceeded that of household savings due to factors such as low interest rates and housing loans. In order to resolve the low growth issue of household incomes, the competitiveness of the services sector needs to be enhanced, since this sector represents a significant portion of the total added value and is highly effective at creating jobs.