NABO Economic Trends & Issues (Issue No. 84)
Published on 22 October 2019
Published by Macro-Economic Analysis Division of the Economic Analysis Bureau
I. Economic Trends
Recently, the Korean economy has continued to suffer from a continued decline in exports and investments, leading to an ongoing recession. Exports in September continued to witness a declining trend in export unit prices of key parts - particularly in terms of semi-conductors – recording a double-digit drop, MoM. Plant and equipment investment as well as construction equipment fell by a lower rate in August, MoM, but continues to exhibit weakness as the falling trend persists. Consumer prices in September increased by –0.4% (YoY, monthly) as agricultural, livestock and fisheries prices further dropped along with the price of public services, reaching a new negative record in terms of monthly records. Meanwhile, the treasury bond yield increased and the won-to-dollar exchange rate dropped due to reduced external uncertainties including expectations of a relaxation in the US-China trade dispute as well as economic stimulus measures in China and the Eurozone.
Ⅱ. Characteristics of Korean Consumer Prices in Comparison with Those of Other OECD Members
A comparative analysis against other OECD member countries concluded that, in terms of consumer prices, while Korean energy prices are stable compared to that of other OECD members, its food prices are highly volatile while Korea’s core inflation has recently exhibited signs of contraction. The low consumer inflation rate recorded since 2019 is a result of a combination of all such attributes of Korea’s consumer inflation. High volatility in food prices and the declining trend in core inflation due to weak demand - which are the characteristics of Korea’s consumer prices – have the potential to start a vicious cycle of price instability and deteriorating domestic demand, respectively. Therefore, policies should be implemented to reduce food price volatility in terms of demand and prevent the weakening of domestic demand in terms of supply.
Ⅲ. Estimation of Households’ Marginal Propensity to Consume via the Survey of Household Finances and Living Conditions
As the overall private consumption increase rate has fallen short of the real GDP increase rate since the 2000s, the government has been implementing policies to stimulate domestic demand via boosting the incomes of the lower-income class while maintaining an expansionary fiscal policy outlook. Upon estimating the marginal propensity to consume in each household from 2011 to 2017 by using data from the Survey of Household Finances and Living Conditions, the marginal propensity to consume in lower-income households was higher than that of households with higher incomes. Therefore, increased income among lower-income households is expected to have a relatively significant impact on consumption. In this respect, household consumer sentiment needs to be restored through policies that expand the availability of secure jobs, so that lower-income households may continue to witness an increase in income.