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Title NABO Economic and Industry Trends & Issues (No. 19)

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    2021-07-26

NABO Economic and Industry Trends & Issues (No. 19)

 

 

Published on 26 July 2021
Published by Economic Analysis Department

 

 

I. Economic and Industry Trends
 Recently, the Korean economy has been continuing its recovery but is still exhibiting increasing uncertainty due to the spread of the COVID-19 pandemic. As external exports lead the recovery, exports in June increased by 39.7% YoY. Consumption and investments reversed from an increasing trend over two consecutive months to a decrease, but this appears to be a temporary adjustment given the strong exports and rising consumer confidence index. Consumer prices in June increased by 2.4% YoY, exhibiting a 2.0% range increase rate over three consecutive months. In the financial markets in June, the sovereign bond interest rates (3-year-maturity) and stock prices (KOSPI index) increased while the won-to-dollar exchange rate decreased slightly. In May, production in the manufacturing sector increased YoY but slightly decreased MoM, whereas production in the services sector continues to maintain an upward trend thanks to the flourishing financial and insurance businesses. Exports by the 11 promising industries in June significantly increased YoY due to strong figures in semi-conductors and general machinery, exhibiting an increasing MoM trend. The imported energy price index in June recorded a double-digit increase rate over two months in a row, due to factors including oil price hikes. In terms of employment, the total number of newly employed people was maintained at an impressive level of increase due to factors such as the recovering job market in the services sector as well as the base effect, but the rate of increase was lower than that of the previous month. The nationwide housing sales price index and the jeonse/monthly rent price index in June increased by a wider gap compared to the previous month.

 

Ⅱ. Pending Issues in the Economy and Industry
 ■ Recent trends and implications in global key interest rates

  As governments throughout the world have been pursuing accommodative monetary policies since the outbreak of the coronavirus, key global interest rates have now reached record lows. There are concerns about a potential increase of inflationary pressure should the current trend of low interest rates continue amid the global economy exhibiting an increasingly strong recovery trend. In all probability, major economies experiencing stronger inflationary pressure alongside a rapid economic recovery this year are already discussing raising their key interest rates. Therefore, appropriate response measures suitable for the Korean economy should be developed by considering the impacts of global hikes in key interest rates on the overall macro-economy.
 ■ Analysis of the status of Korean Outward Direct Investment(ODI)
  Recently, Korea’s outward direct investment has increased steeply in terms of investment volume as well as in the number of investment fields; significantly in finance and real estate market, unlike in the past when investments were focused on the manufacturing sector. Also, more investments are being made in intangible assets such as the field of specialized science and technology as well as the services sector. Among businesses related to advanced technology, both large conglomerates and SMEs invest heavily in the manufacturing of electronic parts, whereas SMEs invest more heavily in medical equipment and pharmaceuticals. While an expansion of ODI is expected to have a positive impact on the Korean economy, strategies to address any negative effects should also be considered, such as if the domestic economy becomes more sensitive to volatile global financial markets, the manufacturing sector’s Korean production base weakens and employment shrinks.
 ■ Main content and implications of the European Climate Law
  Last June 28th, the European Council adopted the European Climate Law which stipulates its “green deal,”followed by the release of its “Fit for 55” policy package on July 14th, as an action plan for implementing the European Climate Law. A wide range of targets for cutting greenhouse gas (GHG) emissions are included such as adjustments of member states’ contributions to emissions cuts, carbon border adjustment mechanisms, GHG emission criteria for vehicles, and a GHG emissions trading system, which are expected to directly affect trade counterparts as well. Since this strategy taken by Europe is intended to expand the institution of recognizing carbon emissions as costs, Korea should externally announce that its target of reaching carbon neutrality by 2050 is equivalent to Europe’s objective, while the government and corporates make strong efforts to enable Korean industry to secure technologies to pursue carbon reduction.
 ■ Trend and implications of the increase/decrease of new employees according to their level of technical skills
  Analysis of the total number of new employees in Korea since 2010 by their level of skills, the number of new employees with mid-level skills has been increasing at a slower pace and reverting to a declining trend, unlike those with high and low level skills. The increasing trend of those with mid-level skills also appears to be subsiding in terms of industry, age groups and gender. As the level of skills is highly correlated to wage levels, if jobs requiring mid-level skills continue to shrink on a structural basis, the labor market duality may be further aggravated.

 

Ⅲ. Economic and Industry Issues
 ■ Characteristics of recent Korean consumer prices and projections

  Recent market prices in Korea have been exhibiting the characteristics of a continuously rising trend in terms of supply and falling administered prices. Energy prices have continued to rise entering 2021 as global crude oil and commodity prices increase, while food prices have also exhibited a strong increase, influenced by weak agricultural harvest from deteriorated climate conditions as well as avian influenza. Administered prices - which consist of items whose prices are set under the government’s influence either directly or indirectly - witnessed a significant drop due to government policies subsidizing medical and education fees, pushing down consumer prices.
Empirical analysis encompassing macro-economic variables that affect consumer prices concluded that core inflation is highly affected by domestic aggregate demand pressure, whereas energy prices are affected by commodity prices and exchange rates.
A projection based on the aforementioned estimation model suggests that the consumer inflation rate in the second half of this year will be around 1.9%. Given its response to domestic aggregate demand pressure as well as its continuity, core inflation is expected to exhibit an increasing trend in accordance with the recovery of business cycles, while energy prices are also expected to reach high levels powered by the rising trend of international commodity prices. On the other hand, the trend of food price increases is expected to slow as the supply and demand of agricultural and livestock goods achieve a degree of stabilization.

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