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Title NABO Economic·Industry Trends & Issues (No. 1)

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NABO Economic·Industry Trends & Issues (No. 1)

Published on January 29, 2020
Published by Economic Analysis Department

I. Economic·Industry Trends
Although the Korean economy continues to experience economic downturn, expectations for economic improvement are rising, centering on employment and exports. During last December, the slowdown in employment in the manufacturing and construction sectors eased, and employment in some service sectors improved as the number of those recruited increased dramatically. The decrease in exports has been reduced to single digits YOY, as uncertainties in the foreign economy eased and exports to China increased. However, overall economic conditions have been stagnant, including sluggish investment and a fall for two consecutive months in the Cyclical Component of Coincident Composite Index. Meanwhile, consumer prices rose on the back of industrial product prices turned upward and a smaller decline in agricultural product prices. In the financial market, exchange rates, interest rates, and stock prices seem to fluctuate due to the conclusion of the 1st round of US-China trade agreement and the rising geopolitical risks in the Middle East. Energy and raw material price indices rose centering on the oil price index and gold prices.

Ⅱ. Pending Economic·Industry Issues
The government announced its economic policy direction for 2020 and set a policy goal of “economic turnaround and economic growth potential enhancement”and presented “specific policy directions of 1 + 4 (breaking through the economic gridlock + four policy directions). It was differentiated from the previous year’s in terms of policies in response to the economic slowdown and export restrictions placed by the Japanese government. The 2019 Household Finances and Welfare Survey showed that households' assets and liabilities, which are in the fourth and fifth quartiles in 2019, increased. Amid recent declines in interest rates (2012-2019) and a rise in the housing market, an analysis of the link between interest rates and housing prices revealed a general negative relationship between interest rates and housing prices. In addition, if market interest rates fall, it is necessary to consider ways to minimize the negative impacts associated with the housing market. There is a need to consider ways to minimize the impact. The Ministry of Employment and Labor announced the “Mid-to-long-term Workforce Supply and Demand Outlook for 2018 ~ 2028” and expects a shortage of workforce due to the decrease in school-age population over the next 10 years. Therefore, it is necessary to reinforce social safety nets and establish a lifelong education service system for workers in areas where structural unemployment is expected to occur.

Ⅲ. Economic·Industrial Issues
The government plans to reduce 37% of its projected Green House Gas (GHG) emission by 2030 with the GHG reduction roadmap in place, and reductions in the power generation sector account for roughly half of this. The power supply composition of 2030 was predicted by using the "8th Basic Plans for Electric Power Supply & Demand,”and accordingly, the implementation of the roadmap for reducing GHG requires the adjustment of power supply mix by reducing the amount of coal generation and increasing the amount of gas generation. This could drive up the energy generation costs by 9.4~55%. Considering the share of the power generation sector in national GHG emissions, the “9th Basic Plans for Electric Power Supply and Demand,”due to be announced this year, needs to consider the alignment with the GHG reduction roadmap for the power generation sector.

If China's economic growth slows down in 2020, it is expected to affect Korea's economy due to its high dependency on trade with China. Analysis using the vector autoregression (VAR) model indicates that, although China's export fluctuations have a meaningful effect on Korea's exports to China and its GDP, an impact on the domestic sector is either small or insignificant. This is due to the China-bound export structure, which has a high proportion of intermediate good exports. Thus, it is necessary to monitor the risk factors originating from China stemming from its economic slowdown, and alleviate Korea’s intermediate good-driven export structure.

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