[Weekly Review] Government Ignites 'Rebound'... Easing External Risks with US-China Trade Agreement

US-China Agreement Raises Concerns Over Negative Impact on Trade
Employment Indicators Show Significant Improvement but Surge Limited to Short-Term and Elderly Jobs
Government Removes 'Weakness' from Greenbook, Supports Bottom-Out Theory

[Image source=Yonhap News]

[Asia Economy Reporter Kim Hyunjung] The government is raising expectations for an economic rebound based on improved export performance and increased production and consumption in the service sector. Thanks to strong exports of semiconductors and petrochemicals, the first export indicators of the new year started on an upward trend, and the trade conflict between the U.S. and China, which was the biggest external uncertainty for our economy, is showing signs of easing following the first round of trade negotiations. With a significant increase in ultra-short-term and elderly jobs, the annual job growth last year recovered to the 300,000 range for the first time in two years. However, some point out that it is premature to be optimistic about the economic situation, as the recovery speed of exports and construction investment is somewhat slow, and employment growth is largely influenced by increased fiscal spending.

◆First export indicators of the new year start on an upward trend... Will it rebound after 14 months?= Thanks to strong exports of semiconductors and petrochemicals, the first export indicators of the new year started on an upward trend. This was influenced by the base effect from the export decline in January last year and the improvement in the semiconductor market. The government expressed expectations that exports could rebound after 14 months if the effect of working days is excluded.

According to the Korea Customs Service, export value (provisional customs clearance basis) from January 1 to 10 was $13.3 billion, an increase of 5.3% ($660 million) compared to the same period last year. Compared to the same period last month, it also increased by 3.7% ($470 million). The number of working days from January 1 to 10 was 7.5 days, the same as the same period last year. The average daily export value was $1.77 billion, up 5.3% from the same period last year.

The increase in average daily export value in the first export report of the new year is a positive signal, raising expectations for an early export recovery. In particular, semiconductor exports increased by 11.5% compared to the same period a year ago, leading the export rebound. Recently, the decline in semiconductor unit prices has somewhat stabilized, and export volumes have increased, which was crucial. An official from the Ministry of Trade, Industry and Energy said, "In December last year, the semiconductor market showed signs of slight improvement, and momentum seemed to revive," adding, "This momentum appears to continue into this year."

Besides semiconductors, exports of petroleum products (30.6%) and ships (0.1%) increased, while passenger cars (-4.6%), wireless communication devices (-4.8%), and automobile parts (-9.6%) declined. By country, exports increased to Vietnam (11.7%), Japan (6.0%), Hong Kong (26.5%), and the Middle East (45.3%), while exports to China (-3.5%), the U.S. (-12.0%), and the European Union (EU, -5.9%) decreased.

[Image source=Yonhap News]

◆Easing of U.S.-China trade war risks... U.S. removes China from currency manipulator list and reaches trade agreement= On the 13th (local time), the U.S. removed China from the currency manipulator list and included it in the monitoring list. The U.S. Treasury's currency report was expected to be released around November last year but was delayed due to the U.S.-China trade negotiations. The U.S. essentially offered China a "carrot" two days before signing the Phase 1 trade agreement.

The Treasury Department explained in the report that through trade negotiations with China, a Phase 1 agreement was reached, and China promised to refrain from competitive devaluation of the yuan and not to use exchange rates for competitive purposes. The agreement that China would disclose information related to exchange rates was also cited as a basis for removing China from the currency manipulator list. The Treasury assessed that the recent appreciation of the yuan alleviated U.S. concerns about yuan depreciation.

Korea was again included in the currency monitoring list. Until June last year, Korea recorded a trade surplus with the U.S. of $20.3 billion over the previous four quarters, and the current account surplus relative to GDP was 4.0%, meeting two of the three criteria set by the U.S. for monitoring countries.

The U.S.-China trade agreement reached on the 15th (local time) is considered an event that alleviated external negative factors this week. The trade truce between the U.S. and China is not only a factor that reduces external risks for the Korean economy but could also positively impact exports through a rebound in global trade volume. However, since China agreed to increase imports of U.S. products, there is a possibility that imports from other countries may decrease, so it is not entirely positive from a trade perspective.

Joo Won, chief economist at Hyundai Research Institute, predicted that the trade agreement between the two countries could be negative in terms of trade. According to the agreement released by the U.S. Trade Representative (USTR), China agreed to increase imports of U.S. products not only in agricultural products but also in manufactured goods, energy, and services. Increasing imports of U.S. manufactured goods could impact Korea. China agreed to import an additional $32.9 billion worth of manufactured goods from the U.S. this year and $44.8 billion next year, totaling $77.7 billion. The imported items include industrial machinery, electrical equipment, automobiles, optical medical devices, steel, and aviation. Korea has a high export share of steel and machinery to China.

◆Surprise increase in jobs in December last year... Employment rate boosted by 'tax-funded jobs'= The number of jobs increased by over 500,000 in December last year, bringing the annual job growth last year back to the 300,000 range for the first time in two years. The employment rate for those aged 15 and over reached its highest level in 22 years. However, it is analyzed that the quantitative indicators improved only because of the largest-ever fiscal spending on jobs, which increased ultra-short-term and elderly jobs, leading to a deterioration in job quality.

According to the 'December 2019 and annual employment trends' released by Statistics Korea, the number of employed people in December last year was 27.154 million, an increase of 516,000 compared to a year earlier. This is the highest increase in 5 years and 4 months since August 2014, when employment increased by 670,000. Accordingly, the annual number of employed people last year was 27.123 million, an increase of 301,000 compared to a year earlier, recovering to the 300,000 range again since 2017. In 2018, the increase was only 97,000.

However, it is difficult to see qualitative improvement as difficulties for those in their 40s persist, and there is a concentration in those aged 60 and over. Employment among people in their 40s decreased by 162,000 last year, exceeding the population decline of 137,000. On the other hand, employment among those aged 60 and over increased by 377,000, surpassing the total employment increase of 301,000. By working hours, employment for 1 to 17 hours increased by 301,000, which is attributed to the expansion of elderly jobs and increased economic participation of women in their 30s.

By industry, quality jobs decreased while jobs funded by fiscal spending increased. Manufacturing employment decreased by 81,000 (-1.8%) last year. Employment also declined in wholesale and retail trade (-60,000, -1.6%) and finance and insurance (-40,000, -4.7%). On the other hand, employment increased in health and social welfare services (160,000, 7.8%), accommodation and food services (61,000, 2.7%), and professional scientific and technical services (60,000, 5.5%). However, the government praised this as a 'V-shaped rebound.'

The government plans to announce measures for jobs in the 40s manufacturing sector by March, considering the unstable indicators. Deputy Prime Minister and Minister of Economy and Finance Hong Namki said regarding the 162,000 decrease in the 40s last year, "We will prepare customized comprehensive measures by March based on an analysis equivalent to a full survey of retirees and job seekers."

◆Government raising expectations for rebound... 'Weakness' disappears from the Green Book for three consecutive months= The government is emphasizing the theory that the economy has bottomed out by citing various economic indicators. In the January issue of the 'Economic Trends (Green Book)' published monthly by the Ministry of Economy and Finance, it stated, "Recently, our economy has seen a moderate increase in service sector production and consumption, and facility investment is gradually recovering from weakness, but exports and construction investment remain in an adjustment phase." The most notable point is that the expression 'weakness' regarding the economy, which continued for seven months from the April to October issues last year, has disappeared for three consecutive months since November, replaced by positive assessments such as 'moderate increase' and 'recovering from weakness.' In particular, the export and construction investment sectors, which were evaluated as factors limiting growth last month, were described as 'continuing adjustment phase.'

However, the indicators still show a flow close to weakness, making it difficult to be optimistic. Exports in December last year, which were described as being in an adjustment phase, recorded $45.72 billion, down 5.2% year-on-year. Construction investment (GDP provisional figure) also decreased by 3.7% year-on-year and 6% quarter-on-quarter as of the third quarter last year. The Ministry of Economy and Finance explained that related indicators have improved this month. According to the Korea Customs Service, export performance from January 1 to 10 increased by 5.3% year-on-year. Hong Minseok, head of the Economic Analysis Division at the Ministry of Economy and Finance, explained, "Due to the Lunar New Year effect this year, the number of working days is 2.5 days fewer than last year, so it is not easy for the overall performance to turn positive, but considering this trend, a daily average turnaround is possible." Regarding the future economic situation, he forecasted, "Leading indicators have risen for three consecutive months, and December last year was significantly large. If there are no additional external shocks, the economy is expected to improve thereafter."

Regarding external conditions that could affect the domestic economy, the U.S.-China trade negotiations were repeatedly mentioned. Although there are signs of improvement in the global manufacturing economy, the signing of the Phase 1 U.S.-China trade agreement and expectations for semiconductor market recovery, uncertainties remain regarding the future development of U.S.-China negotiations, the strength of semiconductor market recovery, and geopolitical risks in the Middle East.