NABO Economic and Industry Trends & Issues (No. 15)
Published on 25 March 2021
Published by Economic Analysis Department
I. Economic and Industry Trends
Although job market conditions remain tough, the Korean economy is maintaining a gradual recovery trend led by exports and plant and equipment investments. As of February, consumer price inflation recorded an increase rate of 1.1% YoY due to increased inflation in terms of agricultural, livestock and fisheries goods. Regarding the financial market during the same period, the Korean treasury bond interest rates and won-to-dollar exchange rate increased, affected by factors such as the increase in sovereign bond interest rates of advanced economies as well as the strong US dollar. In January 2021, manufacturing sector production increased by 7.4% YoY, and exports from the 11 major industries increased by 8.4% YoY. During this month, production in the services sector decreased for the fourth consecutive month (by –2.0%) YoY, while the imported energy price index reached a new peak following the previous record in May 2019. In terms of employment, the total number of employed people dropped by a smaller rate as the third wave of COVID-19 ended and social distancing measures were relaxed. The nationwide housing sales price index volatility rate increased slightly in February MoM, but the jeonse/monthly rent price index volatility rate increased by a smaller increment compared with the previous month.
Ⅱ. Pending Issues in the Economy and Industry
■ Factors behind the US interest rate hike and implications
Due to the back-to-back announcement of large-scale stimulus packages, increased expected inflation and concerns about QE measures ending earlier than expected following a real interest rate increase, the US 10-Year Treasury bond interest rate witnessed a sudden hike of 0.61%p from 0.94% in end-2020 to 1.55% on March 8th, 2021. Although it had little impact on the Korean financial market, continued monitoring is required since this sudden interest rate increase may recur.
■ Post-COVID-19 global economic trends and implications
Moving beyond the COVID-19 pandemic, with the exception of the US and China, countries throughout the globe are expected to experience reduced mid-to-long term growth, and overcoming the pandemic will be a prerequisite for each country’s economic growth. Also, global economic fundamentals are expected to weaken from increased global debt, while conflicts may arise between the US and China, incurring a multi-centralization of the global supply chain. If global price instability and global interest rate increases highlight global economic vulnerability, there is the potential for another global economic recession.
■ Household income and consumption/expenditure trends and characteristics in 4Q 2020
The monthly average income per-household (5,161k won) in 4Q 2020 increased by 1.8% YoY thanks to the significant boost in transfer incomes, despite the double decline of earned incomes and business incomes over three consecutive quarters. Disposable incomes (4,175k won) increased by 2.3% as non-consumption expenditures dropped along with the income rise. Consumption expenditures (2,907k won) decreased by 0.1% and the propensity to consume dropped by 1.7%p. Strengthened social distancing measures led to an increase in household-related consumption while consumption of face-to-face services and outdoor activities decreased.
■ Employment trends in major economies in 2020
Countries exhibited varying trends in terms of labor market shock such as reduced employment and increased unemployment rates due to the spreading COVID-19 pandemic, apparently because each country has implemented different job policies in response to the labor market shock. Since the manufacturing sector is relatively highly represented in Korea, job retention and unemployment allowances should be pursued in a balanced manner in the near term, while in the mid-to-long term, discussing the expansion of the social safety net, linkage between education and jobs as well as the implementation of a policy tool to provide automatic fiscal support in the event of a decline in the economic cycle.
Ⅲ. Economic and Industry Issues
■ The impact of cohort effects and sex ratio at birth on low birth rates
Since 2002, Korea has witnessed its lowest low fertility rates for 19 years on a continued basis. The country’s low birth rate is reaching a critical state with its total fertility rate potentially recording 0.84 births in 2020. According to an age-period-cohort (APC) analysis of the factors behind the changing birth rate broken down into age effects, period effects and cohort effects, it was found that the cohort effects lead such changes. The cohort effect - which represents the birth propensity of each generation – started to decline from the generation born in the 1980s, falling to the lowest point for those born in 1992 before a slight rebound. This result implies that the recent aggravation of the low birth rate issue is mainly because the generation with a low propensity to have children has reached the primary childbearing age, whereas should the increasing trend for birth propensity continue beyond the generation born in 1992 and beyond, the fertility rate could make a rebound. In addition, according to a regression analysis on the relation between the propensity to have children and the sex ratio of newborns (the number of boys per 100 girls), if a region or time of birth has a higher sex ratio among newborn babies, women are less likely to have been married and have children. Given that the sex ratio at birth reflects the preference for sons in the respective region, such a result may have been drawn since the expected role of women after marriage and childbirth has hardly changed, despite their elevated socio-economic status from increased economic activity. This report highlights that the younger generation hopes to live in a society in which marriage and childbirth do not lead to any disadvantage, and multi-faceted policy measures must be pursued to alleviate the low birth rate issue, such as by expanding the definition of the“family”concept in a flexible manner.