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Title NABO Economic Trends & Issues (No. 72)

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    2018-10-20

NABO Economic Trends & Issues (No. 72)

I. Economic Trends
    The Korean economy has recently been exhibiting signs of a slowdown mainly on the domestic demand front, such as through sluggish plant and equipment investments and construction investments as well as the challenging job market. Nevertheless, exports have maintained a steady increasing trend, with average daily exports making up for the impact of increased workdays having reached a record high. In terms of consumer prices, agricultural product prices increased steeply due to the summer heatwave and heavy rain. Despite the US interest rate increase, weaker demand for safe assets resulted in treasury bond yields (3-year-maturity) falling to 1.95%.

 

Ⅱ. Estimates of Potential Growth Rate by Major Korean Institutions
  The definition of potential GDP is the level of output that can be achieved by utilizing the given technological conditions and production factors in a sustainable manner. This concept provides a crucial set of criteria for enacting short-term economic stabilization policies as well as enhancing growth potential and determining fiscal policy trends in the mid-to-long term. However, since it remains an unobserved variable, a high degree of uncertainty is inherent in the methods used to arrive at estimations, which include i) the simple time series approach, ii) multivariate time series approach and iii) the production function approach. 
  Although the potential growth rate estimates published by major Korean institutions vary depending on their date of publication, methodology used and supporting documentation, the consensus is that a deteriorating trend has been ongoing since the financial crisis. Major Korean institutions commonly note that the potential growth rate of the Korean economy has dropped to just above 3% since 2010 and suggest that such a declining trend will continue in the future. It is therefore time to enhance the contribution of labor and capital on potential growth as well as make efforts to improve the efficiency of the economic structure to boost growth potential.   

 

Ⅲ. Analysis of the Impact of Exports on Korean Plant and Equipment Investments
An analysis was conducted on the ripple effects of exports on plant and equipment investments as there are growing concerns about the continued deterioration of plant and equipment investments despite the recent increase in exports. As a result, it was found that exports have recently been having a weaker impact on spurring plant and equipment investments. Such weakened effects appear to have been affected by factors such as the decreased proportion of SME exports, increased overseas direct investment and overseas production as well as the decreased capacity utilization rate of the manufacturing sector.

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