NABO Economic·Industry Trends & Issues (No. 3)
Published on March 19, 2020
Published by Macro-Economic Analysis Division of the Economic Analysis Bureau
I. Economic·Industry Trends
A recent spread of COVID-19 has contracted the Korean economy and the volatility of its financial markets has increased significantly. In January of this year, before the effects of COVID-19 were fully reflected, industrial production was growing for the second consecutive month, and the Cyclical Component of Coincident Composite Index and the Cyclical Component of Leading Composite Index were both rising, hinting at an economic recovery. However, starting in February, the impact of the virus was more explicitly felt in regards to slowing of the economy and elevated uncertainty as daily average export volume and the Composite Consumer Sentiment Index plummeted dramatically. Consumer prices also fell compared to the previous month as service price growth slowed, mainly on personal services, under the influence of COVID-19. The financial market demonstrated high volatility, with interest rates and stock prices nosediving and won/dollar exchange rates soaring due to the spread of the virus. The Energy Price Index diminished as oil prices continued to display a downward trend.
Ⅱ. Pending Economic·Industry Issues
● Oil prices fell sharply as no agreement was reached on further production cuts at the OPEC + General Assembly held in March 2020. Due to weakened demand in relation to COVID-19 and the failure to reach agreement for production cuts at the OPEC meeting, international oil prices this year are predicted to hover below the mid-$50 mark, which is lower than initially expected.
● As COVID-19 spreads around the world, it has emerged as a major threat to the global economy. Key international bodies, including the OECD and the IMF, are lowering their global economic outlook, and countries are coming up with monetary and fiscal policies to counteract the potential economic downturn resulting from the outbreak.
● Although a disruption in domestic semiconductor and display production due to Japanese export regulations has not been significant, Korea needs to develop fundamental core technologies and stridently promote localization of materials, parts, and equipment, while maintaining an open and reciprocal relationship with Japan. In doing so, it must exert efforts to maximize economic benefits through specialization of jobs between the two countries.
● While the government's real estate countermeasures have had some market stabilizing effects on areas subject to regulation, there are concerns about a balloon effect in non-regulated areas based on abundant liquidity. Therefore, the government needs to address the possible impact on the real estate market following the confirmed interest rate cuts in relation to COVID-19, etc., and to broaden the scope of the measures by shifting its focus from housing supply management to demand management.
Ⅲ. Economic·Industrial Issues
● NABO used the data published by the Korean Labor & Income Panel Study (1998-2018) to analyze changes to household spending, and estimated effects by classifying factors affecting household spending by age, generation, and yearly profiles. Analysis illustrated that the spending growth rate increased as the household head’s age increased from their 20s to late 40s, while the rate declined as the household head’s age hit their 50s. In terms of generation factors, the spending growth rate of the baby boom generation (born in 1955-1965) was stagnant compared to previous and subsequent generations, and the spending growth rate of the eco-generation (born in 1980-1990) decreased compared to the previous generation. In addition, it can be said that the growth in spending capacity of the eco-generation - the offspring of the baby boom generation - has declined. Therefore, the lowering of the average spending capacity of households in Korea after 2010 can be attributed to the aging of the baby boom generation and the decrease in the spending capacity of the eco-generation. Therefore, in order to tackle dwindling consumer sentiment caused by old-age income anxiety in the baby boom generation and the elderly, it is necessary to streamline senior income guarantee mechanisms, such as increasing the number of jobs for the elderly and improve the public pension scheme. Furthermore, it is necessary to add stable new jobs in order to expand spending capacity among the eco-generation and young people.
● According to analysis of the distribution and changes in Korean households' assets and incomes from 2016 to 2018 using the Survey of Household Finances and Living Conditions, as of 2018, Korean households were more concentrated in assets compared to their incomes, and the asset concentration of the upper classes was greater than that for income concentration, and real estate accounted for the majority of total assets held by both low and high income households. In addition, between 2016 and 2018, while income inequality in Korean households narrowed, asset inequality widened, and the gap in assets and income between residents in metropolitan and non-metropolitan areas experienced larger separations. This could lead to a reduction in the role of assets as collateral during times of economic hardship in the future, as well as problems that could be caused by the worsening economic inequality between regions.