NABO Economic and Industry Trends & Issues (No. 12)
Published on 22 December 2020
Published by Economic Analysis Department
I. Economic and Industry Trends
The Korean economy has been recently exhibiting signs of a slowdown such as a contraction in consumption despite the export recovery trend, due to the resurgence of COVID-19. Exports - in terms of customs clearance – improved as the daily average export volume increased for two consecutive months from October to November, driven by increased external demand for major items such as semi-conductors. However, in terms of domestic demand, retail sales volume failed to maintain the rising trend exhibited throughout August and September, reversing to a decrease (-0.9%) in October, accompanied by decreases in plant and equipment investment (-3.3%) and construction investment (-0.1%). As the job market continues to experience difficulties as a result of the sluggish economy, total employment in November was 273 thousand lower YoY, recording a declining trend for nine-months in a row since March. As economic activity has been contracting since mid-November, triggered by the sudden increase in newly confirmed cases of COVID-19 infection and strengthened social distancing measures, income trends as well as consumption and employment conditions are likely to deteriorate.
Ⅱ. Pending Issues in the Economy and Industry
■ Trends and Characteristics of Recent Cross-Border Activity and Foreign Residents
While the number of people crossing the border and foreign nationals residing in Korea increased annually by at least 10% and 8% on average between 2009 and 2019, respectively, the figures decreased significantly, YoY, due to the spread of COVID-19. The number of people crossing the border decreased by 572 thousand (-80.6%), YoY, while the number of foreign residents was reduced by 350 thousand (-14.4%). Although the number of short-term foreign visitors and residents have dropped significantly due to the COVID-19 pandemic, the decrease in long-term foreign residents was relatively small.
■ Characteristics of Household Incomes, Consumption and Expenditures in 3Q20
In the third quarter of 2020, fewer people were employed mainly in the manufacturing sector and among self-employed businesses, while the household income increase rate declined as the economy continues to remain depressed, due to the resurgence of COVID-19. Non-consumption expenditures decreased following a decrease in private transfer expenditures and interest expenses, incurring an increase in disposable incomes. However, consumption expenditures which rebounded in the second quarter thanks to the Emergency Disaster Relief Fund decreased in the third quarter, affected by reduced expenditures on items such as gaming, culture, food and accommodation, while the propensity to consume also decreased.
■ North Korean Market Prices and Exchange Rate TrendsDue to the inflation that has continued since the currency reform at the end of 2009, rice prices and exchange rates in North Korea increased from 2009 to 2013, after which fluctuations stabilized. Trade with China and production activity decreased as the regime closed its borders to prevent COVID-19 from spreading, which has led to increased volatility such as a sudden hike in rice prices in early February. Exchange rates dropped significantly in November as the North Korean authorities restricted the usage of foreign currency.
■ Economic Implications of the Concluded Regional Comprehensive Economic Partnership (RCEP) Agreement
On November 15th, Korea, China, Japan, Australia, New Zealand and the 10 ASEAN member states signed the final agreement on the Regional Comprehensive Economic Partnership. RCEP is wider in scope than other multilateral trade agreements, representing 30% of global trade and world GDP, and a stable trade structure is expected upon its entry into force. However, since most of the RCEP member countries already have an FTA with Korea, the actual benefits of its effectuation may not be as significant. There are also concerns about the agreement potentially aggravating regional trade protectionism.
■ Post-COVID-19 Regional Economic Trends
With the spread of COVID-19 infections, production and exports in the second quarter contracted, fewer people were employed and deflation ensued. In terms of cities and provinces, output in the manufacturing and services sectors dropped dramatically mainly in Seoul, Jeju, Incheon and Busan where travel and tourism is fairly strong, as well as Daegu and Gyeongbuk where infections spread rapidly at the initial stage. Although some industries more or less exhibited a recovery entering into the third quarter as production and exports increased, consumption became sluggish and household debts increased.
Ⅲ. Economic and Industry Issues
■ Factors Determining the Final Emissions of Businesses Allocated Emission Allowances
Launched in 2015, the Korea emissions trading scheme (K-ETS) represents 80.7% of Korea’s greenhouse gas (GHG) emissions. This scheme is the main pillar of Korea’s GHG reduction initiative, and has entered its second phase (2018-2020). As much as the final emissions of businesses allocated emission allowances have a big impact on the national GHG reduction, this study reviewed the characteristics of the businesses allocated such allowances and the factors determining their final emission volume. As of 2019, there are 432 large conglomerates and 23 public institutions among 632 allocated businesses, representing 95.5% (conglomerates 61.6%, public institutions 33.9%) of all allocations, revealing their significant role in reducing GHG. An empirical analysis of the factors determining the final emissions of the allocated businesses revealed that the final emissions are reduced when investments are boosted in plants and equipment relevant to GHG reduction as well as when increased R&D investments are made in original technology.