NABO Economic and Industry Trends & Issues (No. 25)

Published on January 27 2022
Published by Economic Analysis Department

I. Economic and Industry Trends
 Recently, in the Korean economy, despite brisk exports and improved employment conditions, economic uncertainty is escalating due to strengthening quarantine measures as a result of the resurgence of COVID-19. Exports in December recorded a higher rate of increase of 18.3% YoY, and the total number of newly employed people in December went up by 773,000 YoY, pointing to a larger MoM jump. In addition, industrial production also increased significantly in November with the gradual recovery of daily life and the easing of disruptions in the supply of parts in some industries. On the other hand, in December, as face-to-face consumption activities and economic sentiment contracted due to strengthened quarantine measures, etc. following the resurgence of COVID-19, the Cyclical Component of Leading Index, which forecasts upcoming economic phases, is on a downward trend for five months in a row after peaking in June, 2021, raising concerns for a possible economic downturn. In the same month, consumer prices rose by 3.7% YoY as prices in agriculture, livestock and fisheries as well as industrial products, and service sectors continued to rise. In December, in the domestic financial markets, although treasury bond yields fell due to concerns over an economic slowdown, the KOSPI index rose due to buying sentiment led by foreign investors. In December, 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
 ■ Economic policy directions for 2022 and their implications
  The Korean economy has experienced four reverse growth periods (Second Oil Crisis, 1997 Currency Crisis, 2007 Global Financial Crisis, and the COVID-19 pandemic) since 1970. While the impact on the real economy due to COVID-19 has been relatively small compared to the previous reverse growth periods, the upward pressure on inflation at this time is relatively larger compared to the previous periods of economic crisis. This may be attributable to a relatively stronger degree of intensity in accommodative monetary policy put in place since the COVID-19 pandemic, as well as a rather tight correlation that has lasted between gross domestic product and government consumption expenditures. A major priority of the Korean economy in 2022 is to find a fiscal, monetary, and financial policy combination that can promote economic normalization while maintaining price stability. From the perspective of aggregate demand and aggregate supply equilibrium, it is necessary to achieve both price stability and economic normalization by supporting a seamless increase in aggregate supply that is adjusted to the rate of aggregate demand normalization.
 ■ 2022 world economic outlook and risk factors
  In 2022, the global economic recovery, albeit accompanying a slowed-down rate of growth, is expected to continue on the back of an increased immunization rate and a more pandemic-resilient economy. A varying degree of economic recovery is expected to occur in countries depending on the difference in vaccine distribution and immunization rates, the scale of economic support policies, and individual economic conditions. Meanwhile, the global economy is facing risk factors that will escalate growth uncertainties. Gaps found in relation to vaccines and the recurring emergence of coronavirus variants could hamper the recovery of the global economy. The global supply disruption is accelerating inflation, and major countries, including the US, are shifting their monetary policies toward the tightening settings to help curb inflation. Moreover, if China, the world’s second largest economy, dwindles, it could send shock waves to neighboring countries in Asia as well as the global supply chain.
 ■ Review of the current status of the US-China trade dispute and its future impact
  The trade dispute between the US and China is disrupting the global value chain and having a significant impact on global trade. The impact is palpable in Korea, because it is highly dependent on trade. For this reason, work towards improving its trade structure, further identification of new markets, and participation in multi-regional trade agreements needs to be carried out to become more resilient to external economic instabilities. In addition, proactive efforts and support for high-tech R&D are required to maintain a competitive edge in trade markets.
 ■ Expected size of labor supply reflecting future demographic change
  Based on recently published future population projections by the National Statistical Office, this report forecasts changes in the labor supply resulting from demographic alterations likely to occur by 2050. Assuming that the labor supply pattern of 2021 is to be maintained, the number of employed persons in 2030 is expected to be 98.4% of that of 2021, and 97.2% of the total working hours, indicating that in the next 10 years, the decrease in labor supply due to demographic change is not expected to be significant. However, the population size is expected to decrease rapidly after that, and the number of employed people and total working hours in 2050 are projected to be 80.5% and 76.8% of 2021, respectively. These forecasted figures are less than what was found in previous studies conducted in 2017, suggesting that the decrease in labor input due to demographic changes could occur faster than previously expected. However, the shock could be eased if labor participation of the elderly is expanded, etc. The estimated labor supply of this report is meaningful in that it provides a useful benchmark that can help policy makers. However, one should be mindful that the finding represents one of the possible scenarios based on various hypotheses, rather than something that has been finalized, thus cannot be changed.

Ⅲ. Economic and Industry Issues
 ■ Analysis of the effects of exchange rates on facility investments
  Korea routinely experiences a huge impact from exchange rates on facility investment, due to its high dependence on imported capital goods for facility investment and its export-led industrial structure. The impact of exchange rate depreciation (the appreciation of the won) on facility investment can differ depending on which path is taken. Although a fall in the exchange rate can act to increase facility investment by lowering the price of imported capital goods, it could work to reduce the demand for new facility investment resulting from a drop in exports. Analysis using the‘real effective exchange rate’as the exchange rate variable indicates that, although the shock of an increase in the real effective exchange rate (the appreciation of the won) reduces facility investment, the actual impact from it is expected to appear with a time lag of about 8 quarters. Subsequently, should the recent accumulation of current account surplus and delay in US interest rate hikes, etc. act to cause the won exchange rate to fall (the appreciation of the won) in the future, it could cause facility investment to decline, which makes exchange rate volatility management all the more important.