NABO Economic and Industry Trends & Issues (No. 14)
Published on 24 February 2021
Published by Economic Analysis Department
I. Economic and Industry Trends
Due to the resurgence of the coronavirus, the Korean economy has been exhibiting negative business sentiment despite the gradual recovery trend from improved exports, especially in terms of face-to-face services. As of January 2021, consumer price inflation recorded a low increase rate of 0.6%, while treasury bond interest rates and stock prices rose from the previous year whereas the won-to-dollar ratio staged a rebound following a period of decline. The 11 major industries continued to experience strong exports in January and the imported energy price index peaked over the past 20 months, while commodity prices showed an increasing trend overall. Volatility in the housing sales price index and the jeonse/monthly rent price index in January increased by a reduced gap MoM, with low employment numbers due to the significant drop in the number of employed people.
Ⅱ. Pending Issues in the Economy and Industry
■ Analysis of post-COVID-19 stock price changes by company size and sector
Since the outbreak of the coronavirus from late January 2020 to late January 2021, KOSPI market capitalization increased by 624 trillion won (43.7%), with stock price increases mostly stemming from increases in large cap stocks and the manufacturing sector (especially the electronics and electric sector). Contributions to the KOSPI hike were evident in price increases by large cap stocks at 79.0%, the manufacturing sector at 80.5% and the electronics and electric sector among the manufacturing sector at 42.5%. In addition, the analysis identified risk factors in the domestic stock market as the widened discrepancy between the stock price index and corporate performance since the outbreak of COVID-19 as well as the increasing dependency on individual investors in the stock market. Therefore, measures must be developed to address the potential risk of a stock price increase incurred by a discrepancy with corporate performance, while expanding the demand base for domestic stocks.
■ Status and implications of China’s digital RMB
Among major economies recently, there has been growing attention paid toward the issue of Central Bank Digital Currency (CBDC) holding legal tender status. China has already been working on a CBDC since 2014 and is recognized as the leading country in terms of CBDC development as it launched a digital RMB pilot program in 2020 in major cities such as Beijing, Shenzhen and Suzhou. While the digital RMB is expected to facilitate the internationalization of the RMB as it can be freely used beyond Chinese borders, there is also concern about privacy violations since all related data are digitalized and stored centrally. As much as the issuance of the Chinese digital RMB may significantly affect the Korean financial market, a thorough review should be made on the spillover effects of the digital RMB and response measures.
■ The Biden administration’s trade policy and its impact on Korean industries
Since the Biden administration took office, US trade policy has been highly expected to shift from promoting protectionism and bilateral negotiations back to pursuing multilateral trade, while changes are likely to be made in terms of industries related to corporate regulation of the national defense sector. Therefore, Korea should also seek strategies with higher flexibility when pursuing trade policies while at the same time working to adjust production strategies to address potential challenges and opportunities faced by Korean companies as the US increases investments in boosting production on US soil as well as strengthens environmental and labor regulations.
■ Wage trends before and since the advent of COVID-19, and related implications
The impact on the labor market caused by the spread of the COVID-19 pandemic has also affected wage levels, resulting in varying outcomes depending on the workers’ status and business size. In terms of workers’ status, full-time employees were hit by a wage shock and temporary workers by a job crunch. In terms of business size, the size of special payments were significantly reduced in businesses with at least 300 employees.
Ⅲ. Economic and Industry Issues
■ Characteristics of the recent won-to-dollar exchange rate decline and its impacts on the real economy
The won-to-dollar exchange rate jumped suddenly in the first half of 2020 due to concerns about a credit crunch from the impact of COVID-19, but dropped by at least 10% in the second half as the weak dollar persisted. For a country like Korea with a highly open economy, won-to-dollar exchange rate volatility can have a significant impact on domestic demand (investment and consumption) as well as on imports and exports via changes in terms of trade circumstances and real purchasing power. A lower real exchange rate (an appreciation of the KRW) is assumed to significantly boost plant and equipment investment and private consumption in the short-term as imported goods experience a price decline. In the longer term, exports and imports are likely to be more affected by real economic factors overseas such as the global economic growth rate and external trade volume, rather than exchange rate factors. In addition, while a temporary increase in exchange rate volatility is not deemed to have a significantly negative effect on the real economy, a continued increase in volatility can escalate uncertainty in external conditions and potentially incur a contraction in private consumption and investment. Close monitoring is required of the deterioration of profitability in exporters following a potentially strong KRW as well as uncertain factors in the foreign exchange market arising from the COVID-19 pandemic and sudden changes in external conditions.