NABO Economic Trends & Issues (No. 82)
Published on 22 August 2018
Published by Macro-Economic Analysis Division of the Economic Analysis Bureau
I. Economic Trends
As exports and investments continue to decline, the Korean economy has recently witnessed increased uncertainty in terms of external economic conditions as well as elevated downside risks. Exports continued to significantly decline due to a slowdown in the global economic cycle and the prolonged US-China trade dispute, while external exports witness aggravated challenges incurred by the recent export restrictions imposed by Japan. Deteriorating exports have led to a contraction in domestic production and a continued trend of investment decline, while retail sales have also declined with low sales of durable goods and semi-durable goods. Consumer price inflation fell to 0.6%, lower than that of the previous month as petroleum and similar products’ prices sharply declined and prices of livestock goods reversed back to a falling trend. Meanwhile, the decision by the Bank of Korea to lower the benchmark interest rate and increased external uncertainties have led to an increase in won-to-dollar exchange rates and a decrease of treasury bond yields.
Ⅱ. Analysis of the Cause of GDP Deflator Increase Rate Volatility in Korea and Major Economies
The GDP deflator is a comprehensive price indicator calculated on an ex-post basis based on the outcome of GDP estimates, and is determined by dividing the nominal GDP by real GDP. Particularly in fiscal terms, GDP deflator volatility is a variable that has a significant influence on major fiscal variables such as tax revenues and expenditures occurring in nominal terms as well as government debts. Since the 2000s, the GDP deflator increase rates in major economies are estimated to have been significantly affected by factors including real GDP gaps, exchange rates and oil prices. The increased real GDP gap has boosted the GDP deflators, specifically having an increasingly strong impact on the Korean, US, UK and German economies since the global financial crisis. Exchange rate volatility has varying impacts depending on the country, over a time lapse. It is assumed that the GDP deflators in Korea and Italy are more sensitively affected by exchange rates compared to those in other economies.
International oil prices had a positive (+) impact on the GDP deflator increase rate in the UK and US during the same quarter, whereas they have varying impacts depending on the country, over a time lapse, in other economies such as those in Korea, Japan and the eurozone.
Ⅲ. International Comparison of the Wealth Effect of Private Consumption on Real Estate
A data analysis of 37 subject countries, the OECD and emerging economies concluded that real estate price volatility affects consumption via the wealth effect. An estimation based on panel data from 2000 to 2018 and since the financial crisis (2010-2018) concluded that a statistically significant positive impact exists between private consumption and housing prices. This implies that an increase (or decrease) in housing prices may lead to increased (or contracted) private consumption. In the country-specific analysis of seven major economies, a statistically significant positive impact was also found between private consumption and real estate prices in four countries including the US and France. Such findings imply the potential possibility that real estate price changes impose a wealth effect on consumption. Meanwhile, there is no statistically significant impact between real estate price volatility and private consumption in Korea, which seems to be due to a conflicting wealth effect between households residing in self-owned homes and those living under a lease contract, with mixed directionality.