NABO Economic and Industry Trends & Issues (No. 17)
Published on 27 May 2021
Published by Economic Analysis Coordination Division, Economic Analysis Department
I. Economic and Industry Trends
Lately, Korea's export focused economy has been on a positive streak, and COVID-19 vaccinations along with loosened social distancing measures have contributed to an increase in what was sluggish spending. The consumer price index in April was 2.3% YoY, up 1.5% compared to the previous month. In April, the won/dollar exchange rate declined, and the treasury bond yield and stock prices rose thanks to improved economic conditions at home and abroad. In March, due to improved performance by semiconductors, etc., production in the manufacturing sector increased by 4.7% YoY, and production in the service sector also increased for the second consecutive month. Also, the top 11 major industrial exports increased by 46.3% YoY. In the meantime, energy prices in April fell slightly from the previous month, but prices of raw materials such as agricultural produce and metal minerals rose. During the same month, although housing purchase price composite indices and monthly rental and deposit-based housing lease (cheonsei) price indices continued to rise, the rate of increase slowed. Employment in April increased significantly MoM on the back of strong exports and increased production in the manufacturing sector.
Ⅱ. Pending Economic and Industrial Issues
■ Recent trends and implications of expected inflation rates
The expected inflation rate is rapidly increasing from 1.6% in June 2020 to 2.1% in April 2021 due to elevated liquidity following COVID-19 policy responses, raised global economic growth rates, and the continued easing of monetary stances in major countries. The increase in the expected inflation rate adversely affects the real economy and decreases the real interest rate by way of increasing wages and inflation, thereby resulting in a greater preference for stock markets and real estate as a means for investment, and leading to a rise in nominal interest rates. Rising nominal interest rates may dwindle household consumption and corporate investment, and aggravate the downside risks of stock and real estate prices by increasing the burden of repayment of loan interest. If the rising trend of expected inflation continues, the easing of monetary policy may shift its direction faster than expected, which is why the government needs to minimize the impact on the real economy and financial markets through continuous close monitoring of the situation.
■ Characteristics and prospects of recent private consumption
In the first quarter of 2021, private consumption turned from last year's sharp decline to an increase and, in particular, consumption of semi-durable goods and in-person services, which had been lackluster since the start of the COVID pandemic, are showing signs of gradual recovery. Starting in mid-February, increased outdoor activities and traffic volume have led to increased face-to-face activities-related consumption. Private consumption in 2021 is expected to grow, centering on consumption of goods, as overall consumption, which was limited by the spread of COVID-19, gradually recovers. However, which path private consumption will take is expected to be determined by whether or not the consumption of in-person services, which is still sluggish, recovers.
■ International comparison of technology level and implications of core strategic technologies
Comparison of the Technology Level of Korea's core strategic technologies with major countries indicates that although the gap between Korea and countries with the most advanced technologies has narrowed, its technological advantage over China has significantly decreased. The Technology Level of ICT/SW sectors in 2018, and life/health care and energy/resource sectors in 2020 shifted to comparatively inferior in relation to China. As China's total R&D investment is significantly higher than that of Korea in terms of size and rate of increase, Korea needs to focus on core strategic technologies with its limited investment in resources along with creating a favorable investment environment.
■ Impact of the spread of COVID-19 on population mobility
Since the outbreak of COVID-19 in February 2020, the number of confirmed cases of COVID-19 seems to have moved in the opposite direction from the general population movement of Korea. During the first pandemic phase (February 16, 2020 - March 8, 2020), the second pandemic phase (August 9, 2020 - September 13, 2020), and the third pandemic phase (November 15, 2020 - January 24, 2021), the number of daily confirmed COVID-19 cases and daily average population movement recorded the quarterly maximum and minimum numbers, respectively. Analysis, using data on the number of confirmed cases and mobility since the outbreak of COVID-19 in Korea, showed that increases in the number of confirmed cases reduced mobility, and the increase in the number of confirmed cases 4 days ago lead to the reduction of current population mobility.
Ⅲ. Economic and Industry Issues
■ The effect of macroeconomic variables on capital inflows and outflows in the domestic stock market: focusing on the US quantitative easing policy
The rapid capital inflow to Korea right after the Global Financial Crisis stemmed from the macroeconomic impact of the global economic recovery, and the expanded global liquidity caused by the implementation of quantitative easing policies in advanced countries such as the US and Japan. Immediately after the outbreak of COVID-19, the US implemented quantitative easing policies by way of large-scale asset purchases to stimulate the economy. An economic recovery in 2021 may signal a change in the future monetary policy of the US, which could contribute to potential capital inflows or outflows in the Korean stock market. which is why their inner workings have been analyzed.
Findings of the analysis of the effect of macroeconomic variables on foreign capital investment in domestic securities reveal that significant impact is driven by an improved global economy, global financial market volatilities, and differences in internal and external interest rates. In addition, while the abundant global liquidity driven by the implementation of quantitative easing policies through asset purchases by the US Federal Reserve facilitated the inflow of capital into the domestic stock market, this quantitative easing seemed to result in reductions in capital inflows and capital outflows.
Since there are growing concerns for potential inflation due to the alarming speed of the rebounding US economy, close monitoring of the monetary policies of major advanced countries such as the US, as well as bracing for increased volatilities in the future in domestic capital inflows and outflows needs to take place.