NABO Economic·Industrial Trends & Issues (No. 6)
Published on June 22, 2020
Published by Macro-Economic Analysis Division, Economic Analysis Department
I. Economic·Industrial Trends
The Korean economy is continuing to witness economic activities decline due to the impact of the recent COVID-19 spreading across all sectors. During April, the industrial production index decreased 6.0% MoM with the negative impact of the pandemic affecting not only the service sector but also the manufacturing sector. In addition, due to the global economic recession, exports in May were -23.7% YoY, following a severely slumping export volume of –25.1% last month. Due to sluggish production and exports, the total number of the employed in May (26.93 million) decreased by 392,000 YoY, and the unemployment rate (4.5%) increased sharply also. Consumer prices recorded a negative rate (-0.3%) for the second time since last September (-0.4%) due to dwindling consumption and plunging international oil prices. In the financial market, treasury bond yields (three-year maturity) and the Korean won continue their decline. The nationwide Housing Price Index rose 0.14% MoM, a less steep incline compared to the previous month.
Ⅱ. Pending Economic·Industrial Issues
■ Recent trends and implications of private sector credit increase in Korea
According to data from the International Settlement Bank, the ratio of GDP to private credit in Korea (household credit + corporate credit) in 2019 proved the sharpest increase since the Global Financial Crisis. If the recent steep private credit/GDP ratio trend continues amid deteriorating internal and external economic conditions, growing financial vulnerabilities of the private sector could become a burden on the real economy in the future.
■ Causes and implications of recent decline in currency multiplier
The currency multiplier, which seemed to be at a standstill in 2019, has been on the decline starting in 2020. Some of the key reasons behind the decline may include a decreased demand for funds due to the growing economic uncertainties and increased cash holdings by economic subjects in relation to lower interest rates and prices. Under these circumstances, the effectiveness of the expansionary monetary policy may need to be re-evaluated in addressing COVID-19 related issues.
■ Changes and characteristics of recent household income and consumption trends
As for household incomes in the first quarter of 2020, with the wealth quintile moving close to the top, more significant household income growth was witnessed, while consumption dropped considerably in relative terms in low-income households, widening the gap in household income inequality and consumption expenditures. Due to the impact, etc. of the COVID pandemic, while consumption expenditures decreased in apparel, shoes, education, food and lodging, spending increased on food, non-alcoholic beverages, and health care.
■ Main contents of the government's economic policy direction in the second half of 2020
The government showed its commitment to put the nation’s economy back on track to overcome the current economic crisis earlier by announcing its direction for economic policies for the second half of this year. However, as fiscal soundness may be compromised due to the continued overall expansionary fiscal policies put in place, making efforts to improve fiscal sustainability should take place.
Ⅲ. Economic · Industrial Issues
■ Analyzing the status change and its rationale in the net barter terms of trade (NBTT)
The net barter terms of trade (NBTT), which is the ratio of export price to import price per unit, is very important in Korea because of its high reliance on exports. Recently, the NBTT has been on the decline, which has led to deteriorating consumer sentiment as it is lowering the national income growth rate. The factors, including global trade volume, high value-added trends, and crude oil price of goods, were found to have a statistically significant effect on changes in the NBTT. Considering that Korea is structurally vulnerable to external volatility, such as global trade volume and crude oil prices, industrial competitiveness and energy efficiency need to be improved, while adding higher value to export products as well as differentiating them through continuous technology advancement.
■ The effect of the size of those highly educated and temporary workers on youth unemployment
While the average youth unemployment rate in OECD countries (aged 20~34) increased significantly following the Global Financial Crisis before beginning to decline after 2013, Korea's youth unemployment rate has continued to rise. A panel analysis was conducted for 34 OECD countries to ascertain the effect of those highly educated and temporary workers on youth unemployment, and the analysis indicates that growing numbers of those with higher education qualifications increase the youth unemployment rate in the 20~29 year old age group, while a higher number of temporary workers leads to decline in the youth unemployment rate in the 20~29 year old age group. Such results suggest the need for implementing employment policies that take into account age group-specific employment characteristics.