NABO Economic and Industry Trends & Issues (No. 27)
Published on March 29, 2022
Published by Economic Analysis Department
I. Economic and Industry Trends
The Korean economy is maintaining a moderately-paced economic recovery centering on exports, but uncertainty is growing due to the spread of the latest COVID-19 variance, the Ukraine conflict, and the US Federal Reserve's decision to raise the policy rates. Although exports in February amounted to 53.91 billion dollars, up 20.6% YoY, the consumer sentiment index (CSI) in February recorded 103.1, down 1.3p MoM reflecting contracted consumer sentiment following the spread of the new COVID variant. Additionally, growing uncertainties in the global energy market in relation to the Ukraine conflict led to price hikes in crude oil, coal, and natural gas, with crude oil prices hitting the highest since September 2014 in particular. In February, the total number of employed persons increased by 10.37 million YoY, with those mainly in the service industry seeing a significant jump. The won/dollar exchange rate rose MoM as preference for safe assets was boosted due to the US Federal Reserve's decision to raise the policy interest rates and the Ukraine conflict, and the consumer price index (CPI) in February also saw a steep increase, centering on industrial products and personal services, etc. In February, the volatility rate of the nationwide housing sales price index and the volatility rate of the jeonse/monthly rent price index increased slightly MoM
Ⅱ. Pending Issues in the Economy and Industry
■ Analysis of the relationship between fiscal balance and current account balance
Concerns over twin deficits are rising due to the fiscal balance deficit and the shift in the trade balance to a temporary deficit following the recent surge in energy prices. Accordingly, results of estimating the effect of the fiscal balance on the current account balance using the analysis of current account determinants are as follows: The fiscal balance from two years ago exhibited a positive relationship with the current account balance of the same year. However, since 2009, the financial authorities' efforts to stabilize interest rates; a decrease in revenues following a slowdown in internal and external demand, and investments; falling international oil prices; and primary income landing in the black may have dampened the impact of the fiscal balance on the current account or increased the current account. Worsening fiscal balance with other conditions remaining the same in the future may affect not only the current account but also the overall economy, and this begs the need for much-needed policy attention.
■ US interest rate hikes and domestic economic trends
Historically, the US raised policy interest rates in 2004, and 2015 respectively during the periods of economic recovery, the former following the IT bubble, and the latter following quantitative easing. During the US interest rate hikes, domestic interest rates displayed an upward trend once, and interest rate inversion between Korea and the US occurred in the other instance when the domestic base rate was raised, with limited outflow of foreign investment capital on both occasions, however. As for the stock market, although it was temporarily corrected at the beginning of the rate hike, an upward trend was witnessed due to the resolved uncertainties and favorable economic conditions following the rate hike. As the US base rate hike reflects signs of economic recovery, the impact on the real sector seems to be insignificant. The US policy rate hike in 2022 will likely elevate volatility in the domestic financial market in the short term, although, as the measure came in consideration of the economic recovery, the ensuing shock is expected to be somewhat variable.
■ Household income and consumption expenditure trends and characteristics in 4Q21
During the fourth quarter of 2021, household income increased by 6.4% (2.8% in real income) YoY to 4.642 million won led by hikes in earned income, business income, and transfer income following consumer sentiment recovery resulting from the rise in the number of employed persons, average monthly wage, and easing of quarantine measures. While non-consumption expenditure of households increased by 4.8% YoY due to growth in current taxes and social insurance premiums, consumption expenditures rose by 5.8%, mainly on services and semi-durable goods, due to an increase in disposable income, recovery of consumer sentiment, and a rise in consumer prices. Disposable income increased by 6.8% YoY (real disposable income by 3.2%), and the income quintile share ratio for equivalized disposable income was 4.91 times, up from 4.81 times YoY.
■ A study on the supplementary points of statistical data of household debt
In order to analyze risks and design policies in response to the expansion of household debt, there is discussion on improving household debt statistical data. The first discussion is the need to subdivide household debt statistics into general mortgage loans, collective mortgage loans, and jeonse loans. Since each has different demand and supply factors and risk structures, detailed statistics are needed for a clear analysis of household debt risk. The second discussion raises the need to include rental housing security deposits in household debt. It is argued that the jeonse (and quasi-jeonse) system, which exists only in Korea, has a large amount of direct financial debt between households, so it should be included in household debt, but more detailed and careful review is needed because reliable statistics on the size of rental housing security deposits are currently undetermined.
Ⅲ. Economic and Industry Issues
■ Environmental quality and economic growth in OECD countries
This report aims to examine the relationship between economic growth and environmental improvement based on the Environmental Kuznets Curve (EKC) which appears as an inverted U-shaped curve by income level. It indicates that environmental quality is poor at the initial stage of economic growth, but improves once a certain income level or higher is achieved.
The investigation was performed on CO2 emissions and municipal waste generated in OECD countries from 1990 to 2020 with a regression model. The findings indicate that EKC exists in CO2 emissions, but does not in waste, since the turning point was identified in CO2 emissions, but the peak point for the amount of waste generated could not be ascertained. In other words, environmental quality improvements made in line with economic growth are not applicable to all cases. In particular, wastes are affected more greatly by population density and industrial structure than income level; therefore, additional policy efforts are required to reduce the amount of wastes generated and to move toward a circular economy.