NABO Economic and Industry Trends & Issues (No. 24)

Published on 29 December 202
Published by Economic Analysis Department

I. Economic and Industry Trends
 Although the Korean economy has maintained a recovery trajectory of late around consumption and exports, economic uncertainties seem to be rising due to the spread of a novel variant of the COVID-19 virus. Retail sales increased for the second month in a row from the previous month due to expansion of outside activities, and exports are continuing to show strong growth, exceeding $60 billion per month for the first time thanks to increased global demand for imports. On the other hand, production and facility investments in October were sluggish, recording a decline of 1.9% and 5.4% MoM respectively. Additionally growth in the total number of newly employed people in November slowed due to the further decrease in the number of people employed in some in-person service industries following a sharp spike in the number of confirmed COVID-19 cases. Consumer prices in November increased by 3.7% YoY, the highest since December 2011, stemming from the elevated increase in agricultural and fishery products, industrial products, and services prices. In the domestic financial market in November, the won-to-dollar exchange rate and government bond interest rates showed an upward trend following the previous month, and stock prices (KOSPI) demonstrated a downward trend. 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
 ■ Household income and consumption expenditure trends and characteristics in Q3 of 2021
  Household income increased YoY in Q3, because of improved employment conditions, continued recovery of consumer confidence following vaccinations, Disaster Relief Funds and the Chuseok holiday effect, etc. Despite the strengthening of social distancing measures in relation to the 4th wave of the COVID-19 pandemic, increased employment and an improvement in circumstances for service industries led to a YoY growth in earned incomes and business incomes. Furthermore, the distribution of Disaster Relief Funds including Hope Recovery Funds for Small Business Owners, and National Funds for the COVID Win-Win National Support Fund, along with the Chuseok holiday effect, public and private transfer incomes increased significantly as well. Both non-consumption expenditures and consumption expenditures, which make up household gross expenditures, increased YoY. The equivalized disposable income quintile share ratio, which indicates the level of income inequality, decreased YoY, making it a record Q3 since these statistics were first compiled in 2006.
 ■ Relationship between recent money markets and trends of real economic variables
  While the domestic money market of late is aware of high uncertainties in domestic and foreign economies, it has barely acknowledged inflationary risks. It needs to be ready to brace for uncertainties; furthermore, financial institutions are increasing the proportion of long-term funding supplies to businesses to respond to their increased demand for credit for facility investments. Considering that the foundation of Korean manufacturing industries is improving, which can be illustrated by the expected stabilization of inflation witnessed in money markets, the rising number of start-ups in technology-based industries, and enhanced competitiveness in materials and equipment (MPE) industries, etc., the Korean economy is likely to endure a period of disinflation.
 ■ State of local population reduction and its implications
  A faster decline in the population size and proportion of the total population in non-metropolitan areas than in metropolitan areas (Seoul, Gyeonggi, Incheon) in recent years is a cause for concern in regard to the potential overall population decline in non-metropolitan areas. The recent trend of declining population in non-metropolitan areas seems to be due to both ① a natural decrease in the population and ② a net outflow of the non-metropolitan population to metropolitan areas. In particular, the net migration of those 20 to 34 from non-metropolitan areas to metropolitan areas accounted for the largest portion of the outflow of population from non-metropolitan areas. The decrease in the local population in non-metropolitan areas and the influx of younger people into metropolitan areas can have a negative impact on the sustainable growth of both metropolitan and non-metropolitan areas. Therefore, policies that can keep younger people in non-metropolitan areas need to be implemented to respond to decreasing local populations.
 ■ International comparison of private sector debt levels before and after the spread of COVID-19
  With an overall upward trend being exhibited in global market interest rates due to the US Federal Reserve's tapering (quantitative easing), etc., debt changes in the private sector of major countries before and after the COVID-19 upswing were ascertained. Among developed countries, those with the highest household debt-to-GDP ratio before and after the COVID-19 pandemic include Norway, Korea, Switzerland and Canada, and among emerging countries, Thailand topped the list followed by Malaysia, China and Mexico. Also, among developed countries, those with the largest increase in debt-to-equity ratio of non-financial companies to GDP before and after the spread of COVID-19 were France, followed by Sweden, and Spain, while in emerging countries, China, followed by Russia, and Peru. Under these circumstances, assessing various risks centering on major countries that may arise from increased debt and finding ways to manage crises in the financial markets are imperative.

Ⅲ. Economic and Industry Issues
 ■ Analysis of household debt status in Korea
  In Q3 2021, Korea's household liabilities (based on household credits outstanding) stood at 1,845 trillion won, 91.3% of nominal GDP. Households (individuals and non-profit organizations) debt to disposable income ratio was 200.7%, which is higher than the OECD average (129.7%). The results of assessing the factors that changed the household debt ratio for the period from 2008 to 2020 indicate that expanded asset holdings via debt financing led to the increased household debt ratio. The vector auto-regression (VAR) model analysis demonstrates that the household debt ratio falls when nominal GDP rises and an interest rate increase shock occurs, whereas the household debt ratio rises when a housing price increase shock occurs. It may be safe to say that the increase in household debt in Korea could be viewed as alleviating financial instabilities in that such debt is used to finance the purchase of assets such as real estate. However, since Korea's debt-to-income ratio is higher than the OECD average, risks may be intensified in the event of an external shock. For this reason, household credits need to be kept in check in consideration of household abilities to repay debts.