NABO Economic and Industry Trends & Issues (No. 21)
Published on 29 September 2021
Published by Economic Analysis Department
I. Economic and Industry Trends
Recently, the Korean economy has exhibited a slowdown in consumption activity due to the spread of COVID-19, but is continuing to recover overall as exports and industry production continue to increase. As of August, exports significantly increased, recording 34.9% YoY, while production in the manufacturing and service sectors in July respectively increased by 7.6% and 4.2%, YoY. Meanwhile, as the consumption recovery slowed down as a result of the spreading pandemic, retail sales in July decreased by 0.6% MoM, while consumer confidence dropped for two consecutive months. As for the job market, the spreading pandemic has had limited adverse effects mainly in some face-to-face service sectors, contrary to expectations, and continued to maintain a positive recovery trend since the previous month. Consumer prices in August recorded a 2.6% increase YoY. The financial market in August exhibited a decline in interest rates and stock prices while the won-to-dollar exchange rate increased due to uncertainties over the continuous spread of the delta strain in Korea and abroad as well as concerns about the delayed economic recovery in the US and China. The volatility rate of the nationwide housing sales price index and the jeonse/monthly rent price index in August increased by a wider gap compared to the previous month.
Ⅱ. Pending Issues in the Economy and Industry
■ Primary cause of the recent won-to-dollar exchange rate increase and implications
Beginning in 2021, the won-to-dollar exchange rate remained stable at an average of 1,117 won to the dollar up to the 2nd quarter, but has been rising steeply since June. The exchange rate is expected to face increased volatility in the near term from September, depending on changes made in US monetary policy and whether inflationary pressure continues. As the Korean won’s coupling with the Chinese yuan has deepened since the aggravation of the US-China trade dispute, shocks triggering the weakening of the CNY may potentially lead to a weakened KRW. If uncertainties about the global economic recovery increase as the pandemic is likely to prevail over the longer term from the spread of the delta variant, we should be on the lookout for potentially increased volatility in the financial markets.
■ Monitoring the conditions for the U.S. tapering and implications
The U.S. Fed is anticipated to start tapering within this year as the economy is recovering at a faster pace than during the Global Financial Crisis, accompanied by high inflation and a hike in real estate prices. As witnessed from 2013 to 2014, the Fed’s tapering is expected to affect the Korean financial market in terms of asset prices and interest rates. Unlike in the past, however, the impact may be greater considering the recent rate of inflation and size of quantitative easing in the U.S.. In addition, the recent increase in private debt and asset prices in Korea may become potential risk factors. Furthermore, strengthened regulations by the Chinese government, a possible reduction of quantitative easing measures in major advanced economies and financial instability in some emerging economies may incur greater instability in the Korean financial market. Therefore, financial authorities should continue to monitor the situation.
■ Household income and consumption expenditure trends and characteristics in 2Q21
In the second quarter of 2021, an improvement in circumstances for self-employed businesses including face-to-face services due to increased employment and relaxed social distancing measures led to a YoY increase in earned incomes and business incomes. Consumption expenditures also increased with the recovery of consumer confidence in the private sector thanks to vaccinations and other factors. While both earned and business incomes increased, when broken down into income quintiles, all quintiles of the earned incomes increased whereas all but the 3rd quintile increased in terms of business incomes. Both non-consumption expenditures and consumption expenditures increased, while the 5th quintile ratio - which reveals the level of income disparity – increased due to a high base effect of the nationwide Emergency Disaster Relief Funds distributed in May 2020.
■ Analysis of the burden of household debt interest payments following an interest rate raise
Interest rates on household loans are expected to increase as the Bank of Korea (BOK) raised the benchmark interest rate by 0.25%p (8.26). An analysis based on data from the BOK’s household credit statistics and the 2020 Household Financial Welfare Survey shows, every 1%p increase in household loan interest rates is expected to add a burden of 12.5 trillion won to be paid in household loan interest in Korea. In terms of household characteristics, those with the highest burden of interest payment are households whose head is aged 40-49, whose income is in the top 20% and have regular employee status. Close monitoring and policy responses should be pursued to address the credit risk increase among the vulnerable classes and self-employed businesses as well as weakened consumption, that may be incurred by an interest rate hike.
Ⅲ. Economic and Industry Issues
■ Study on the correlation between a manufacturing SME’s productivity and the wage gap between conglomerates and SMEs
The relative wage of SMEs in the manufacturing sector against large conglomerates declined from 55.8% in 2009 to 52.5% in 2015 before rebounding to 58.9% in 2019. Despite the increease since 2015, since the wage gap between large conglomerates and SMEs remains substantial and this is regarded as the biggest cause of inequality in the labor market, there is a need to examine what factors trigger such a situation. A panel regression-based analysis of the correlation between SMEs’ productivity and the wage gap between large conglomerates and SMEs concluded that whenever a manufacturing SME’s total factor productivity increases by 1%p, the relative wages of SMEs against conglomerates increase by approximately 0.03%p. This implies that the wage gap can be narrowed via enhanced SME productivity. However, manufacturing SMEs’ TFP over the period of 2009-2019 is estimated to have dropped by about 16.5%, failing to have contributed to reducing the wage gap between large conglomerates and SMEs.