NABO Economic and Industry Trends & Issues (No. 23)
Published on 29 November 2021
Published by Economic Analysis Department
I. Economic and Industry Trends
As of late, the Korean economy has demonstrated sluggishness in its manufacturing sector, although improvements in employment have been sustained on the back of increased service production and consumption stemming from the rising COVID-19 vaccination rate and relaxed social distancing measures, etc. In September, due to gains in the face-to-face service sector, service industry production grew 1.3% MoM, and retail sales also saw a boost of 2.5% MoM due to recovery in consumers' external economic activities following the ease of social distancing, etc. Exports in October grew 24.0% YoY on the back of increased overseas demand, continuing its positive recovery trend. The total number of newly employed people in October increased by 652,000 YoY due to a surge in the number of people employed in the service sector. On the other hand, production in the manufacturing declined for three consecutive months MoM due to disruptions caused in the global supply chain. In October, consumer prices rose 3.2% YoY, exceeding a 3.0% mark for the first time in nine years and eight months. The domestic financial market in October demonstrated an upward trend in the won-to-dollar exchange rate and government bond interest rates following the previous month, while stock prices (KOSPI) exhibited a declining trend. During the same month, while the volatility rate of the nationwide housing sales price index marginally decreased MOM, the volatility rate of the jeonse/monthly rent price index increased slightly MoM.
Ⅱ. Pending Issues in the Economy and Industry
■ Recent inflation trends in major countries and their implications
In recent years, high inflationary pressures have been building around the world due to growing global demand and rising raw material prices, etc. with the COVID-19 recovery underway. As for advanced countries, disruptions in the global supply chain that have continued since the second half of last year are acting as added factors in pushing up prices. In some emerging and developing countries, increases in import prices resulting from decreased values of currencies seems to be driving their high inflation rates. However, if issues such as rising international raw material prices and disruptions in the global supply chain are eventually resolved in the future, the high inflationary pressures of late are likely to be alleviated.
■ Trade trends in materials, parts and equipment (MPE) industries after Japan imposed export restrictions
Since 2019, when Japan's export controls were put in place, the Korean government has been promoting the diversification of import sources and expansion of domestic production of items related to MPE industries, and the proportion of imports from Japan, China, and the US has fallen accordingly. On the other hand, for some items, such as electronic parts – heavily dependent on Japan, and urea – fully dependent on China, the share of imports from specific countries is high. While the trade balance of the MPE industries with China and the US has been yielding a surplus, it has also been generating a continued deficit with Japan. As most of the MPE companies in Korea are SMEs, gaining a comparative advantage by securing source technologies through technology cooperation programs between large corporations and SMEs is imperative.
■ Recent electric energy price trends in major countries
More than 200 countries attending the 26th United Nations Climate Change conference (COP26) held in Glasgow, UK in early November, agreed to limit the global temperature rise and reduce coal power generation, which is highly likely to lead to a hike in electricity prices in the future. In the EU and Europe, where the share of coal power generation has been reduced and the share of renewable and gas power generation has been increased, electricity prices have continued to rise at an average annual rate of 1.2~1.8%. On the other hand, Korea's electricity prices are lower than those of major countries, and the change in price levels over the past ten years has also been modest compared to those of major countries. However, considering that increased electricity rates are more than likely due to external factors such as responses to climate change, it is high time that the mid- to long-term electricity rate roadmap that takes into consideration the expansion of low-carbon power sources needs to be reviewed.
Ⅲ. Economic and Industry Issues
■ Effect of the cost gap between companies on the distribution of net income
With the emergence of new industries through inter-industry convergence and the spread of contactless economic activities due to the pandemic, the economic gap between companies is deepening in relation to their ability to adapt to the changing business environment. As the gap found in production capacity, sales growth rate, labor productivity, and operating profit margins of companies widens, which consequently leads to a larger gap in facility or R&D investments, creating a vicious cycle of an expanding gap in profitability and productivity. And this could end up in a wage gap for workers. If economic power is too concentrated in a small number of companies, it can act as a factor that exacerbates social polarization. In this respect, this analysis expanded on the previous analysis that focused only on the sales gap caused by the difference in market competitiveness between companies, and paid equal attention to the net profit gap that is deepening between them. In addition, by conducting analysis of the effects on the net profit gap in companies after considering the gap in costs aspect, rather than a simple correlation analysis, implications were drawn in that even when profit gaps occur as a result of free competition between companies, countermeasures to alleviate these gaps caused by economies of scale or information asymmetry are needed.