NABO Economic and Industry Trends & Issues (No. 20)
Published on 25 August 2021
Published by Economic Analysis Department
I. Economic and Industry Trends
Recently, the Korean economy has been continuing its recovery but is exhibiting increasing economic uncertainty due to the continued spread of the COVID-19 pandemic. As the June retail sales volume exhibited an increasing trend, exports in July also recorded an impressive increase rate. However, as COVID-19 containment measures have been reinforced since July, there are concerns about the recovery trend losing momentum mainly in the face-to-face service industry. Consumer prices in July increased by a mid-2% range over four consecutive months, marking an increase of 2.6% YoY. In the financial markets in July, the sovereign bond interest rates (3-year-maturity) and won-to-dollar exchange rate increased, while stock prices (KOSPI) exhibited a declining trend. In June, production in the manufacturing sector increased both in YoY and MoM terms, whereas production in the services sector continued to maintain an upward trend thanks to production gains in finance, insurance, wholesale and retail. In terms of employment, the adverse impacts of reinforced social distancing measures were apparent in some sectors, but the rate of increase of all newly employed people remained high from the previous month. The volatility rate of the nationwide housing sales price index and the jeonse/monthly rent price index in July increased by a wider gap compared to the previous month.
Ⅱ. Pending Issues in the Economy and Industry
■ Impact of foreigners’ stock investments on Korean stock prices and stock price volatility
As share ownership by foreign investors, who own around 35% of Korean listed shares, exhibits a declining trend, recent foreign investments are showing characteristics of concentrating on large-cap shares as well as communications and export-powered sectors, with an increasing trading turnover ratio. Correlation and rolling analyses revealed that the impact of foreign net buys on the Korean stock price return ratio has recently weakened, whereas the impact of foreign net buys on stock price volatility has increased. Ways to mitigate risk factors should be explored while remaining aware of the potential risks of foreign stock investments.
■ Inflationary effects following the US’ expansionary fiscal policy
In order to overcome new challenges such as increased inequality, climate change and US-China conflict and to rebuild the US economy, the Biden administration has been pursuing the most significant expansionary fiscal policy since World War II. However, some people believe this is an excessive move at a time when the US Fed has implemented a zero interest rate policy as well as quantitative easing measures, spiking concerns about inflation similar to that of the 1970s. The success or failure of rebuilding the US economy through an expansionary fiscal policy will be highly influenced by changes in the inflation forecasts, and we should remain aware of the potential for the economy to become unstable if inflationary pressures are triggered by a sudden spike in expected inflation.
■ Highlights and major issues regarding the 2022 minimum wage hike
The minimum wage for 2022 has been confirmed as 9,160 Korean won, a 440 won (5.1%) increase from 2021. The Minimum Wage Commission set forth the economic growth rate, consumer price increase rate and forecast of the new employment increase rate as the rationale behind the hike. In the process of finalizing the minimum wage for 2022, the gap in views between management and labor failed to narrow and the Commission ended up adopting the minimum wage increase rate based on the sole proposal suggested by members representing the public interest. There was discussion on differentiating the minimum wage among different sectors but this measure was voted down, resulting in the same minimum wage being applied to all sectors in 2022.
■ Highlights and implications of the 2020 population and housing census
According to the 2020 population and housing census, the total population increased by a meager 0.1% compared to 2019, whereas the total number of households increased significantly by 2.8%. In particular, there were 500,000 new single families mainly among unmarried young adults in their 20s and senior citizens. The total population is expected to decrease while the total number of households may increase for a significant period of time moving forward. The recent escalation in housing prices have led to a population shift from special and regular metropolitan cities to nearby cities and provinces. A pattern of population shift from special and regular metropolitan cities to adjacent cities and provinces can be witnessed in examples such as the shift from Daejon/Chungnam to Sejong, Seoul to Gyeonggi, and Busan to Kyeongnam.
Ⅲ. Economic and Industry Issues
■ Analysis of the export volatility factors in the display industry and their economic impacts
The display industry has been growing as one of Korea’s export leaders, but is now exhibiting signs of a decline in exports due to the growing Chinese display industry. Based upon a constant market share analysis on the factors behind export volatility in the display industry, it was found that while LCD exports have been witnessing a continued export decline since 2014 due to reduced demand and weakened competitive edge, OLED exports have increased since 2015, powered by strengthened competitiveness and increased demand. An economic contribution analysis concluded through an input-output analysis that due to the fluctuating export volume and changing spillover effects per-unit, the weight of other electronic display devices (i.e. OLED) in the economic spillover effects incurred by exports from the display industry, seemed to be increasing significantly. The display industry is an export-led industry with major forward linkage effects, and requires collaboration between the government, industry and academia to maintain and improve its export competitiveness. Although Korea continues to maintain the highest global market share and a qualitative edge against China in terms of the OLED market, Chinese manufacturers are narrowing the quality gap at a rapid pace, while Korea’s qualitative advantage is also weakening. Therefore, newly added value should be created through increased R&D investment, including by securing next generation display technology earlier than its competitors.