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Title NABO Economic· Industrial Trends & Issues (No. 4)

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    2020-04-23

NABO Economic· Industrial Trends & Issues (No. 4)

 


Published on April 23, 2020
Published by Macro-Economic Analysis Division, Economic Analysis Department

 


I. Economic·Industrial Trends

 

Due to the recent COVID-19 outbreak, the Korean economy has been suffering from declining production, lower domestic demand, and a worsening employment rate. During the month of February, economic activity weakened under the influence of the virus, with Index of All Industry Production, retail sales, and facility investment growth rates dropping significantly. In March, COVID shock became visible mainly in the service industry, where the number of newly-recruited employees decreased significantly. In March, consumer prices rose 1.0% from YoY, which was slightly lower than the previous month (1.1%). In the same month, due to the widespread uncertain market sentiment caused by COVID-19, the stock market and interest rates fell while the won-dollar exchange rates rose. In the meantime, international energy and raw materials price indices fell sharply as inventory rose at a rapid pace after their global demand plunged due to the spread of COVID-19.

 


Ⅱ. Pending Economic·Industrial Issues

With an aim to stabilize the financial market in the short-term, the Bank of Korea has introduced and implemented a liquidity promotion scheme in the lend without limits approach for three months starting April. The system is expected to not only ease the credit crunch in the financial market and maintain the effectiveness of monetary policy, but also improve financing conditions of public institutions and conduce to better the financial structure of securities companies.
 


Review of the extent of consumption drop through credit card authorization histories following the spread of COVID-19 indicates that the authorized amount in March, when the virus began to spread more quickly, was 66.5 trillion won, a 4.3% YoY decrease. By sector, except for wholesale & retail, and health & social welfare services; and by region, excluding Seoul and Jeonnam, the authorized amount fell.


In March, when the impact of COVID-19 became more palpable, a reduction of fine dust seemed evident. In relation to this, the monthly review of the factors that cause fine dust illustrates that the improved air quality seems to be attributable to multiple causes, including slowed domestic and foreign production activities due to the virus, weather conditions, and effects of related policies implemented.

 


Ⅲ. Economic · Industrial Issues
 
Since 2004, the government has been implementing early fiscal executions aimed at alleviating uncertainty, promoting private consumption and investment, and minimizing unused budgets. However, there are concerns about compromised economic effects due to weak fiscal responses to economic shocks in the second half of this year and insufficient preparation for the implementation of projects. Under these circumstances, in this analysis, the economic effects were estimated through panel analysis of major countries and policy simulations using a macro model. The panel analysis indicated that early fiscal executions may have a positive effect on the flexibility of fiscal expenditures of GDP, albeit the degree of such impact is limited. The economic net effect of early fiscal execution, estimated with macro-econometric models, also turned out positive, but given the unused budget rate of roughly 3%, its effect appears limited. Therefore, in order for early fiscal execution to achieve desired results, bolstering project plans and improving execution efficiency, among others, will be needed.

 Discussions on socio-economic inequality are growing as interest in inclusive growth has increased along with deliberation on sustainable growth. In particular, according to Piketty (2014), as the rate of return on capital continues to exceed the rate of economic growth, the accumulation of capital (asset) increases rapidly, raising concerns that the gap in household economic status may be exacerbated following gaps in household assets. This report analyzed the actual data and found the following: an analysis of the household wealth distribution in OECD countries illustrates that in all OECD countries, including Korea, compared to income, financial assets are more concentrated on households in the top wealth quintile. Considering that the gap in the household economic status may worsen due to household general income as well as the wealth effect arising from household assets, the current wealth redistribution policy focused on household income has a limit to which it can resolve the inequality present in household economies. For this reason, strategies that take into account the wealth effects of assets to address inequality in household economies are needed, rather than those that focus on household income alone.

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