NABO Economic and Industry Trends & Issues (No. 16)
Published on 26 April 2021
Published by Economic Analysis Coordination Division of the Economic Analysis Bureau
I. Economic and Industry Trends
Recently, the Korean economy has been witnessing improvement in the manufacturing sector due to the continuously strong exports, while expectations of an economic recovery are growing. Consumer price inflation as of March recorded a higher increase rate than the previous month (1.1%) at 1.5% YoY. In the financial market in March, as the sovereign bond interest rates exhibited an increasing trend based on prospects of a volume increase of sovereign bond issuances, stock prices increased from inflows of individual investment funds while the won-to-dollar exchange rate increased as a result of the strong US dollar. Production in the manufacturing sector increased by 1.0% YoY in February due to strong results from the semi-conductor industry, while production in the services sector reverted back to an increasing trend over five months, recording 0.7% growth YoY as wholesale and retail sales reverted to an increase. Exports by the 11 promising industries increased by 16.2% YoY. The imported energy price index in March reached a record high surpassing the previous figure of December 2018, while energy demand decreased MoM in February due to the reduced demand for heating. In terms of employment, the total number of newly employed people reverted to an increase for the first time in 13 months, thanks to relaxed social distancing rules and expanded program for public sector jobs promotion. The nationwide housing sales price index and the jeonse/monthly rent price index in March continues to maintain an increasing trend, but with a smaller increase.
Ⅱ. Pending Issues in the Economy and Industry
■ Analysis of the correlation between the increase of sovereign bond issuances and market interest rates
The first supplementary budget for 2021 was approved at the National Assembly’s Plenary Meeting on March 25th, for which the government plans to issue additional sovereign bonds to source 9.9 trillion won out of the total expenditure increase of 14.9 trillion. To the extent that the direction and scale of impact that increased sovereign bond issuances have on market interest rates may vary depending on economic conditions, efforts to ensure a stable credit spread are required moving forward. In particular, it should be noted that a continued increase in the outstanding balance of sovereign bonds may incur higher concerns about fiscal soundness and widen the credit spread.
■ Analysis of the climate and environmental policies of the Biden administration
On inauguration day, the Biden administration declared the US’ recommitment to the Paris Agreement on Climate Change, prioritizing objectives to develop new technology, create new jobs and pursue economic growth via proactive cut targets of greenhouse gas (GHG) emissions and increased clean energy supply. Such climate and environmental policies proposed by the administration are similar to Korea’s Green New Deal, but with emphasis on creating more American jobs and manufacturing in America. Although Korean industries are responsible for investing in production plants and equipment and observing regulations for GHG reductions, it is necessary to explore measures to seize the opportunity to expand their market coverage in environmentally-friendly industry and maintain a competitive edge.
■ Characteristics and implications of the recent trend of global debt accumulation
Global debts increased at an unprecedented pace and by a record high volume due to the recession incurred by the COVID-19 shock and the responsive large-scale fiscal stimulus measures undertaken by governments. The global government debt-to-GDP ratio in 2020 is expected to reach a record 99%. It is time for a swift and impactful policy response to prevent the current global debt accumulation shock from resulting in a financial crisis such as a credit crisis, foreign exchange crisis or banking crisis, as in the previous debt wave.
■ The post-pandemic employment status of young adults viewed through employment supplementary indicators
Affected by the spread of the COVID-19 pandemic, the number of newly employed young adults in 2020 recorded the highest drop since the 1998 Asian Financial Crisis. The unemployment rate among young adults, however, only recorded a slight increase, suggesting that the employment status of young adults has not been accurately reflected. On the other hand, since the outbreak of the pandemic, there was a significant increase in the third employment supplementary indicator (extended unemployment rate) for young adults, which most accurately represents the level of unemployment as it is felt by young adults. Also, the gap between the extended unemployment rate and official unemployment rate has gradually increased. The reasons behind such widening gap should be identified in detail when developing measures to tackle unemployment among young adults.
Ⅲ. Economic and Industry Issues
■ The impact of monetary liquidity increases on sector-specific inflation
There is rising concern that the quantitative easing measures implemented to revamp the economy since the outbreak of the COVID-19 pandemic may impose inflationary pressure through increased market liquidity. However, since the 2000s, despite the steady increase of liquidity, low inflation has been maintained while exhibiting a weakening positive correlation between liquidity and inflation. However, in the case of total inflation, the impacts of sector-specific inflation tend to be accumulated, resulting in a reduced scale of inflation volatility stemming from increased liquidity. In this respect, this report intends to analyze the impact of the monetary liquidity increase on inflation in 12 individual areas categorized by purpose of expenditure. Throughout the analysis period (1Q‘87 to 4Q‘20), it was found that liquidity leads to higher inflation in a statistically meaningful way, particularly boosting inflation in terms of staple goods and personal services. However, since 2000 (1Q‘00 to 4Q‘20), the statistically meaningful relation between liquidity and inflation has weakened significantly, resulting in liquidity having a statistically insignificant impact on sector-specific inflation, except in some services sectors.