NABO Economic Trends (No. 37)

Published on 23 June, 2023
Published by Industry & Energy AnalysisDivision

■ Economic Trends
   Despite the recent stabilization observed in consumer prices, the Korean economy continues to show sluggish trends, attributed to a decrease in both consumption and exports.
   Regarding domestic consumption, all sales categories, including durable, semi-durable, and non-durable goods, experienced a slowdown, leading to a 2.3% MoM contraction in retail sales for April. Facility investment recorded a 0.9% increase, primarily driven by the transport equipment sector, while growth decelerated in the machinery sector. The value of construction completed exhibited growth, mainly led by the building construction sector. In May, exports declined 15.2% YoY on the back of reduced exports in the 11 major industries, a shortage of working days, and underperformance in the IT sector. As a result, the trade deficit has endured for 15 consecutive months. The cumulative trade deficit from January to May amounts to USD 27.3 billion, which accounts for 57% of the annual deficit recorded in 2022.
   Consumer prices increased 3.3% YoY, although the pace of growth slowed 3.7% MoM. Production recorded a modest upturn, primarily driven by expansion in the service sector (3.1%) and construction sector (12.2%), while the manufacturing sector showed a sluggish performance (-9.0%). Employment growth remained positive, particularly in the service sector and among the elderly population. In May, the number of employed persons rose by 351 thousand YoY, and the unemployment rate decreased 0.3%p YoY to 2.7%. The population continues to decline naturally, with a 0.4% decrease YoY in the registered population in May.
   With the modest easing of domestic and external uncertainties in the financial market, the yield of 3-year maturity government bonds, as of the end of May, experienced an increase of 3.5% MoM, and the won/dollar exchange rate recorded KRW 1,322. Energy prices decreased in both MoM and YoY terms. As for the real estate market, the decline in the housing sales price index was mitigated (-0.22%) due to expectations of a market recovery. During the January-April period, total government revenue decreased 13.9% YoY, primarily attributed to the downturn in asset markets and deteriorating corporate performance. Moreover, total government expenditure decreased by KRW 26.5 trillion (-9.9%) YoY, mainly attributed to the reduction in projects related to the response to the COVID-19 crisis.

■ Pending Economic Issue 「Recent Discussion and Review of Inflation Targeting」
   Inflation targeting is a monetary policy framework that designates the inflation rate as the goal. Many major economies implementing inflation targeting typically set a 2% inflation target. Nevertheless, concerns have emerged recently regarding the necessity of adjusting the inflation target due to persistent high inflation globally, as the 2% target may potentially lead to decreased consumption and an economic slowdown. In the case of Korea, although there are signs of a slowdown in recent consumer price inflation, the core inflation rate remains elevated, suggesting the limited probability of an immediate adjustment to the inflation target within this year. However, it is necessary to take into consideration the changes in the economic structure and the dynamics of inflation when contemplating potential future adjustments to the inflation target.