NABO Economic and Industry Trends & Issues (No. 18)
Published on 25 June 2021
Published by Economic Analysis Department
Ⅰ. Economic and Industry Trends
As exports are increasing by a wider margin, the Korean economy has recently been regaining strength from higher consumption with increased external activity and increased expectations of a recovery. As of May, consumer price inflation increased by 2.6% YoY, recording a higher increase than the previous month (2.3%). In the same month, the Korean treasury bond interest rates (3-year-maturity) decreased whereas KOSPI stock prices and the won-to-dollar exchange rate increased. In April, manufacturing sector production increased by 13.0% YoY as production increased in major industries, while service sector production also exhibited an increasing trend for three consecutive months due to relaxed social distancing measures. Exports from the 11 major industries increased by 49.2% YoY in May, drawing an upward trend for six consecutive months. Over the same month, energy prices including petroleum and coal as well as commodity prices such as agricultural goods and metallic minerals increased MoM. The nationwide housing sale price index volatility rate in May increased by a smaller margin from the previous month, while the jeonse/monthly rent price index volatility rate remained at the same level as the previous month. In terms of employment in May, the total number of people with new jobs increased significantly as in the previous month, thanks to strong exports, increased manufacturing sector production as well as the recovery of the service sector job market.
Ⅱ. Pending Issues in the Economy and Industry
■ Post-pandemic fiscal expenditures in major economies and recent trends in economic growth rates
In order to address the economic crisis incurred by the COVID-19 pandemic, many economies have implemented stimulus measures and are maintaining an expansionary fiscal policy trend. Each country’s fiscal expenditures taken in response to the pandemic boost economic growth and contribute to global economic recovery in the near term. However, despite the expansionary fiscal policy trend, the country-specific pace of recovery is expected to vary depending on the damage caused by the virus and each country’s economic conditions. In order to mitigate the economic shock incurred by the continuously spreading pandemic and rapidly return to the growth trajectory of the pre-COVID-19 era, a comprehensive set of policy responses is necessary such as infection prevention, acceleration of vaccine supply and protection of the vulnerable classes.
■ Household income and consumption/expenditure trends and characteristics in 1Q 2021
The monthly average income per-household in 1Q 2021 reached 4,384k won, increasing by 0.4% YoY (0.7% decline in real income). This is because of the significant increase in transfer incomes despite the parallel YoY decrease of earned incomes and business incomes due to reduced jobs mainly in the face-to-face service industry as well as the continued slump in self-employed businesses. Non-consumption expenditures dropped consistently as social distancing measures remained from the resurgence of COVID-19, while the income level of the bottom quintile of the population increased significantly compared to the top quintile population, leading to a decline of the Levelized Disposable Income 5th Quintile Ratio, which indicates the level of income disparity, improving the income distribution level.
■ Foreign direct investment trends in Korea and their economic spillover effects
Although FDI in Korea in 2020 dropped by 14.8% YoY to 4.93 billion dollars as a result of COVID-19, such performance was relatively impressive compared to the worldwide FDI decline identified by the United Nations Conference on Trade and Development. FDI in Korea between 2010-2020 exhibited a reduced share of the manufacturing sector and increased representation in the service sector, whereas green-field-type investments increased by a higher rate than M&A-type investments. By region, most investors were based in Europe, followed by Asian investors. An analysis of the economic spillover effects of FDI revealed that the service sector was relatively more affected in terms of inducing production, added-value and job creation. Since FDI is expected to have economic spillover effects such as contributing to enhanced production including via technology transfer as well as job creation, an investment-friendly environment must be fostered to increase FDI.
■ Trend of household debt repayment capability by age group of the heads of households
Household debts (in terms of household credit) in 1Q 2021 increased by 9.5% YoY to nearly 1,765 trillion won. An analysis of the Household Financial Welfare Survey data revealed that over the period of 2017-2020, the average annual income of Korean households with financial debts increased by about 8.6%, whereas financial debt increased by 18.1%, aggravating the households’ burden of debt repayment. Upon examining the loan-to-income ratio (LTI) and Debt Service Ratio (DSR) based on the age group of the heads of households, households headed by those at least 60 years of age had high LTI (166.6%) and DSR (31.9%), calling for the need to manage debt repayment burdens among senior citizens. Between 2017-2020 among households whose heads are in their 30s and 40s recorded a significant increase in LTI, respectively recording an increased rate of 23.0%p and 15.8%p; while their DSR (as of 2020) was also high at 28.6% and 29.1%, respectively. Therefore, efforts must be made to resist excessive debt increases.
Ⅲ. Economic and Industry Issues
■ International comparison of how asset price fluctuations influence private consumption
Since the global financial crisis, amid rising stock prices and real estate prices due to measures such as expansionary monetary policies, private consumption in major economies has also been exhibiting an overall upward trend. A panel data analysis of OECD member countries on how asset price fluctuations impact private consumption revealed that fluctuations in real estate and stock prices affect consumption through the economic entities’ asset effect. An estimation made on the period between 2000-2019 revealed a statistically significant positive correlation at a significance level of 1% among private consumption, housing prices and stock prices in the 27 OECD member countries. This implies that private consumption may increase when housing (and stock) prices rise. Estimations of the periods prior to and after the global financial crisis exhibited a statistically significant positive correlation between private consumption and real estate prices during both periods, but a statistically significant positive correlation between stock prices and private consumption was only found in the period before the financial crisis. A country-specific analysis of six economies over 2000-2019 highlighted a significant correlation between private consumption and asset prices in a number of economies. According to an analysis of the six economies prior to and after the global financial crisis, the statistical significance generally declined between private consumption and asset prices since the outbreak of the crisis. This is possibly due to the post-crisis gap that has emerged between real economic conditions and asset price hikes due to the enhanced liquidity incurred by measures such as quantitative easing implemented by central banks in major economies. Meanwhile, an analysis of the Korean market between 2000-2019 revealed an asset effect in terms of real estate prices but no statistically significant correlation as to the analysis of before and after the global financial crisis. For a more detailed analysis of the asset effect in Korea, consideration should be given to conducting an in-depth analysis taking into account the characteristics of asset transactions and holdings.