NABO Economic and Industry Trends & Issues (No. 13)
Published on 25 January 2021
Published by Economic Analysis Coordination Division of the Economic Analysis Bureau
I. Economic and Industry Trends
Although the Korean economy has been recovering primarily due to manufacturing sector exports, the services sector continues to witness weak domestic demand from the resurgence of COVID-19 with deteriorating job market conditions. While exports surged by 12.6% YoY, maintaining a strong recovery over three consecutive months led by the IT sector inclusive of semi-conductors, relevant plant and equipment investments also increased mainly in terms of machinery such as electric and electronic devices. However, since mid-November, due to the steep increase in confirmed COVID-19 cases and associated reinforcements in infection prevention and control, the consumer sentiment index declined significantly (97.9 in Nov → 89.8 in Dec), leading to a contraction in consumption and a record high decrease rate in total employment throughout the year (628,000 fewer people were employed), especially in the face-to-face service sector. Consumer price inflation in December recorded a 0.5% increase YoY as inflation slowed down in the agricultural, livestock and fisheries industry and low inflation was maintained in terms of services. The financial markets in December exhibited a decline in the won-to-dollar exchange rate and stock price increase amid the weak dollar in the global market, expectations of the commercialization of COVID-19 vaccines and abundant liquidity in the market.
Ⅱ. Pending Issues in the Economy and Industry
■ Stocktaking of economic conditions and economic policy direction for 2021
The global economy in 2021 is expected to grow by 4.0 to 5.2%, backed by governments’ active recovery measures and a recovery in consumption. The Korean economy is also expected to exhibit a gradual recovery, but with inflation incurred by increased liquidity and the risk of higher asset price volatility. Against this backdrop, the Korean government announced its economic policy direction for the year 2021, prioritizing proactive economic management, recovery of domestic demand, enhancing investments and exports as well as stabilizing public welfare. While the economy and global trade are expected to recover to a certain degree in 2021, the COVID-19 crisis may also be prolonged, and the pandemic should be managed securely while pursuing multidimensional policy measures to boost domestic demand and exports. Also, continuing efforts must be made to realize a vibrant economy to improve domestic demand, investments and exports; make up for any weaknesses in the economic structure and make concerted efforts toward securing drivers of sustainable growth.
■ Briefing on the EU-UK negotiations on a future relationship
Since the United Kingdom’s withdrawal from the EU in January 2020, negotiations have been held on its future relationship with the EU during the transition period. However, there were concerns about a “no-deal Brexit”as different positions regarding major issues remained unsettled. However, the two parties reached a deal on their future relationship based upon mutual concessions on core issues and announced The EU-UK Trade and Cooperation Agreement on December 24th. However, uncertainty remains in future discussions regarding the services sector including finance, with the British real economy and financial sector likely to be affected in due course.
■ Status of 2020 household assets and debts
Household assets as of late March 2020 reached 445.43 million Korean won and household debts stood at 82.56 million won, increasing by 3.1% and 4.4%, respectively, from 2019. Amid a higher debt increase rate than asset increase rate, 10.7% of households with financial debts have failed to pay back their principal and interest within their payment period, and the highest reason for the payment delinquency was a decrease in income (33.1%). Furthermore, the number of households reporting that they are burdened by having to pay back principal and interest was nearly 67.6% as their debt burden has somewhat increased, further deteriorating households’ financial circumstances.
■ Global trends and implications of the bio-pharmaceutical industry
Since the bio-pharmaceutical industry not only generates high added value but also significantly contributes to job creation, it has recently gained attention as an industry that can help overcome the low economic growth witnessed in Korea and abroad while pursuing continued growth. The bio-pharmaceutical market is expected to maintain high annual growth of 8.5% on average over the next five years, exceeding 505 billion dollars in terms of market size by 2026. Governments and companies across the globe are pursuing multifaceted strategies to secure their share in this global market in advance. In addition to large-scale R&D, M&As are also being actively pursued to rapidly secure new ideas and technologies. Aware of the growth potential of bio-pharmaceuticals, companies in other industries are also increasing their R&D spending on M&As with pharmaceutical firms. Recently, the development of vaccines and medication have been gaining attention due to the spread of COVID-19, and as the diagnosis kits manufactured by Korean companies and “K-Quarantine” model are highly regarded, Korean bio-pharmaceutical products have also garnered higher awareness. This should serve as an opportunity to enter advanced markets with high entry barriers, to which end proactive growth strategies must be devised through public-private collaboration.
Ⅲ. Economic and Industry Issues
■ The impact of interest rate changes on private consumption
As a pre-emptive measure against the economic slump, the financial authorities lowered the benchmark interest rate four times since June 2019 from 1.75% to 0.5%, down 1.25%p. A shift in interest rates affects private consumption via diverse spillover channels including interest rates, asset prices, credit and exchange rates, and its effects may be limited if there are obstacles in the spillover channels depending on economic conditions. It was found through analysis of the affect of interest rate changes on private consumption around the 2008 global financial crisis period that from 2000 until the breakout of the global financial crisis, private consumption increased 0.008% whenever the call rate fell by 1%p, whereas private consumption increased 0.32% every time real housing prices increased by 1%. However, the impact on private consumption was not as strong post-crisis. This is presumed to be affected by the significantly increased liquidity and heavier burden of paying back principal and interest from increased household debts, due to prolonged low interest rates and increased openness in the capital market amid economic uncertainties prevailing in Korea and abroad. As there is rising concern about financial market stability becoming undermined as the abundant liquidity created by low interest rates flows into the real estate and stock markets, efforts need to be made to enhance the effectiveness of monetary policies.