NABO Economic and Industry Trends & Issues (Issue no. 9)
Published on 21 September 2020
Published by Macro-Economic Analysis Division of the Economic Analysis Bureau
I. Economic and Industry Trends
The Korean economy has recovered to some extent from weak production and exports recently, but downside risks mainly in terms of consumption and employment have increased since August, due to the re-emergence of COVID-19. Production in July increased by 0.1% MoM as the services sector continued to grow over four consecutive months; and exports in August appeared to recover from a slump, exhibiting a MoM single-digit decrease rate (-9.9%) over two consecutive months and an export volume increase by $1.8 billion on a daily average. On the other hand, consumption in June dropped significantly due to waning policy effects and inclement weather. Meanwhile, as the number of COVID-19 cases witnessed an upswing since mind-August and disease control measures have been reinforced, real economic indicators, especially regarding consumption and employment, are likely to deteriorate over August and September. Consumer prices increased by 0.7% (0.3% in July) MoM in August, as agriculture, livestock and fisheries prices increased significantly. The treasury bond yield (3-year-maturity) in August remained the same as the previous month, while the won-to-dollar exchange rate has dropped for three consecutive months and equity prices maintain an increasing trend.
Ⅱ. Pending Issues in the Economy and Industry
■ The reason behind the recently weakening US dollar
Since mid-May, the US dollar has witnessed a drop in value against currencies of emerging economies. The biggest reason for such trend is the US Federal Reserve’s massive monetary injection over a short period of time in order to relieve the economic recession and credit crunch incurred by COVID-19. Treasury Bonds are increasingly exposed to the risk of an interest rate hike as more countries with deficits issue sovereign bonds. In order to prevent this, the Federal Reserve is resisting pressure to raise interest rates through active quantitative easing policy measures. The weak US dollar is expected to persist for quite some time since it is a result of the US’ increased monetary supply, and therefore is likely to aggravate uncertainty in emerging markets.
■ The EU Carbon Border Adjustment trend and response measures
The EU Carbon Border Adjustment Mechanism is aimed at preventing carbon leakage, which is expected to be adopted by the European Parliament in the first half of 2021 and come into effect by January 2023 at the latest. Once the Carbon Border Adjustment Mechanism takes effect, it may aggravate the burden of carbon emission by Korean businesses, which are already bearing the cost of emissions through the Korean carbon trading scheme, and is expected to have a negative impact on Korea’s exports to the EU. Nevertheless, since a range of discussions are expected to take place in the course of pursuing the Carbon Border Adjustment Mechanism, such as on standardizing greenhouse gas emissions as well as on verification and reporting, future measures to introduce the Mechanism should be monitored with appropriate responses, while companies make preemptive efforts, with government support, to develop technologies to reduce greenhouse gas emissions as well as develop related products.
■ Characteristics of Household Incomes and Consumption Expenditures in 2Q 2020
In the second quarter of 2020, during which COVID-19 was actively spreading, all market incomes decreased including earned income, business income and property income. However, because public secondary incomes have increased significantly due to the Emergency Disaster Relief Fund, total household income has increased. Despite COVID-19, household consumption expenditures increased YoY thanks to the Emergency Disaster Relief Fund. As a result of social distancing, household spending patterns have shifted, as spending increased on food, household essentials and living while decreasing in travel-related areas.
■ Trends Related to North Korea’s Post-COVID-19 Trade with China
North Korea’s trade volume with China was on the rise, but has reversed back to a falling trend since 2016 due to the economic shifts in China and its reinforced sanctions against North Korea. In particular, there was a sudden drop in the trade volume as North Korea closed its borders beginning in January 2020 to prevent COVID-19 from spreading. The reduced trade activity between North Korea and China is likely to incur a decrease in North Korea’s foreign currency liquidity, which may aggravate market prices and exchange rate volatility.
Ⅲ. Economic and Industry Issues
■ The Impacts of the Aging Working Population and Automation on Labor Productivity
Korea has become an aged society with a smaller working age population due to its low birth rate and aging population. Therefore, there is growing concern about a labor shortage and productivity decline throughout the overall economy. According to country-specific studies, several countries that have experienced such issues have either maintained or increased their productivity levels by actively utilizing automation technology. A regression analysis based on a workplace panel survey concluded that advancements in automation lead to an increase in labor productivity, whereas the aging of the labor force reduces labor productivity. Also, even if labor productivity falls due to a higher proportion of aged workers, it can still be increased through automation. Thus, it is necessary to consider actively pursuing the introduction of automation as a strategy to respond to the labor shortage and productivity decline incurred by demographic changes.