Revised Economic Outlook for Korea

The Korean economy is solidly on track to rebound in 2021 even when the nation's battle with COVID-19 continues. The contraction in Korea's GDP in 2020 was modest in comparison to many other advanced economies, and the Korean economy held up better and showed greater resilience in the face of economic downturns triggered by the pandemic. This relatively good performance reflected strong fiscal and monetary policy response and robust external demand, especially for semiconductors, consumer electronics and health products. These growth drivers will likely continue to keep the economy moving forward.

(Sources: OECD, the Ministry of Economy and Finance of Korea, May 31, 2021)

With prospects for the global economy improving, economic growth projections for Korea have been revised upwards. In late May, the Organization for Economic Cooperation and Development (OECD) upgraded Korea's GDP growth forecast to 3.8% from its previous projection of 3.3%. "Strong export growth, rising investment and expansionary macroeconomic policy are boosting the economy. Distancing measures have contained the COVID-19 virus spread, but weigh on large parts of the service sector, which keeps unemployment and the household saving ratio relatively high. When those restrictions can be lifted, the economy will gather momentum," the OECD said in a report on the global economic outlook.

The OECD's revised forecast came on the heels of the Bank of Korea's projections. Korea's GDP is expected to grow by 4% in 2021 following a reduction of 1% in 2020, according to the revised outlook released by the Bank of Korea on May 27, 2021. Consumer spending is projected to rebound to a 2.5% increase in 2021 after a sharp contraction in 2020. Household savings have increased as the COVID-19 pandemic caused uncertainty regarding future income and employment prospects. These increased savings may turn into a driver of consumption growth once the pandemic is kept in check.

(Source: Bank of Korea, May 27, 2021)

However, the pace of recovery may not be as fast as hoped for. A slower recovery may be attributed to delayed improvement in household income and the continued implementation of social distancing measures. Inevitably, the speed of recovery depends on effective and sustained control of COVID-19 and swift vaccination.

Equipment investment is expected to rise by 7.5%, driven by solid investment spending in the IT sector and a recovery in non-IT investment. Construction investment will rebound with a 1.3% growth being forecast for 2021. The civil engineering construction sector will continue to fare well thanks to the government's investment in infrastructure, while the severe contraction in residential construction is set to slow down.

A steady upward trend will continue for intellectual property investment, which is forecast to grow by 4.3% in 2021. R&D investment is expected to be on the rise thanks to improving corporate revenues in the private sector and an increase in government budget for R&D. Growing demand for software applications for online platforms and services will also help boost investment activities in other intellectual property sectors.

(Source: Bank of Korea, May 27, 2021)

The nation's external trade conditions are on track to improve, with a broad recovery in global demand setting the stage for an exports rebound. Merchandise exports are projected to grow by 9% in 2021, backed by the IT sectors, particularly the semiconductor industry. Non-IT sectors are also heading for a robust recovery as demand for petroleum-based products is likely to expand. Robust export performance may offset weakness in domestic consumption, helping the economy emerge from the pandemic-triggered slump faster than expected.

Korea's current account surplus is projected to reduce to USD 70 billion in 2021 from USD 75.3 billion in 2020 mostly due to an increase in service account deficit. Since the onset of the COVID-19 pandemic, many countries have imposed travel restrictions, and the resulting plunge in international travel has led to a decline in service account deficit. When the spread of coronavirus is subdued, the amount of deficit may widen again. The nation's merchandise account surplus is likely to narrow when international oil prices see an upside in 2021.

Consumer price inflation will likely trend up from 0.5% in 2020 to 1.8% in 2021 as upward pressures may gather some strength in line with a rising pace of economic recovery. Rising prices of crude oil and agricultural produce and a hike in housing rental costs will become factors that push inflation up. Meanwhile, there will be weaker downward pressures coming from government policy measures such as government subsidies for high school education and mobile phone bills. Core inflation, which excludes food and energy prices, is also forecast at 1.2% in 2021, up from 0.4% in 2020.

Labor market conditions remain weak in 2021, although the number of the employed people is bouncing back. Around 140,000 persons are expected to be added to the workforce in 2021 compared to a decrease of 220,000 in 2020. Once the surge in new COVID-19 cases is tamped down, a modest recovery is expected in the most impacted sectors such as hospitality, brick-and-mortar retailers, restaurants, entertainment and recreation. The job reduction in the manufacturing industries will also slow down, backed by demand recovery at home and abroad. The unemployment rate is projected at 3.9% in 2021 down from 4% in 2020.

Korea's GDP Growth in the Second Quarter of 2021

The Korean economy expanded by 0.7% in the second quarter of 2021 following a 1.7% growth in the previous quarter. The continuous growth was driven by a pick-up in consumer and government spending. Compared to a year earlier, the nation's gross domestic product (GDP) increased by 5.9% – the fastest growth in a decade. This was in part because of the low base figures for the second quarter of 2020, and it remains to be seen whether the economy will be able to maintain the recovery momentum given the recent resurgence of COVID-19 in July and August.

Private consumption rose by 3.5% during April through June after growing by 1.2% in the first three months of the year, while government spending increased by 3.9%, driven by health insurance expenditure. Equipment investment growth slowed to 0.6% in the second quarter from 6.1% in the first quarter, and the increase mostly came from the transportation sector.

Although exports jumped by 22.4% year on year, they shrank by 2% from the prior quarter, putting a drag on overall economic output in the second quarter. A shortage of semiconductors for automobiles was a primary factor that reduced exports, but outbound shipments of cars continued to grow strongly.

The fourth wave of the coronavirus pandemic that Korea is now struggling to contain may put the brakes on its economic recovery. In particular, rising daily new infections during the summer vacation season are likely to weigh on the services and tourism sectors, casting clouds over the recovery of consumer spending and employment. In the Seoul metropolitan areas, tighter social distancing measures have been implemented to curb the further spread of COVID-19 during the peak summer holiday season. They include a ban on gatherings of more than four persons before 6 p.m. and no more than two persons after 6 p.m. as well as business curfew after 10 p.m. for restaurants, cafes and bars.

*Figures in ( ) refer to year-on-year growth rates. (Source: Bank of Korea, July 27, 2021)

The Rise of the Metaverse and its Impacts on the Economy and Financial Industry

The metaverse is coming, and it is going to be the next big thing. Metaverse - a combination of meta (beyond) and universe - literally means "beyond universe" and is typically defined as a collective virtual shared space. It combines virtual worlds, augmented reality, and the internet, and creates a world where physical reality is merged with the digital universe.

The metaverse is classified into four types as below:

Two major drivers behind the emergence of the metaverse are the fourth industrial revolution and the COVID-19 pandemic. Building on the third digital revolution, the fourth industrial revolution is now underway, bringing about fundamental changes to the way the economy works and the way people live, work and socialize. These changes are being fueled by technology breakthroughs in areas such as robotics, autonomous vehicles, artificial intelligence, and the Internet of Things. All these technologies are facilitating the development of core infrastructure of the metaverse.

The outbreaks of COVID-19 has been speeding up the creation and widespread use of a virtual shared space, accelerating the path to the metaverse. The pandemic has left people spending time indoors, working and studying from home, and networking with each other online, all of which are becoming a new normal. Contactless interactions have become more common than traditional face-to-face interactions in the new normal, drawing a great deal of attention to metaverse technologies. Indeed, after the onset of the pandemic, the average daily usage of virtual reality devices in Korea increased by 37.9% compared to the pre-pandemic level according to a survey by the Korea Creative Content Agency.

A wide range of companies in various industries are setting their eyes on the emerging metaverse trend. The rise of the metaverse is projected to boost GDP globally by up to USD 1.5 trillion in 2030 from USD 46.4 billion in 2019 according to PwC, a global consulting firm.

(Source: PwC)

This means that the metaverse may bring huge growth opportunities to businesses in terms of product and service development, marketing, and business process improvement. In response, the Korean government initiated an industry alliance in May 2021 to undertake joint metaverse projects and promote the development of metaverse technologies and ecosystems. The alliance consists of 17 companies including a major auto manufacturer and wireless carriers, and eight industry groups including the Korea Mobile Internet Business Association.

Against this backdrop, the financial services industry is also intent on embracing the metaverse to attract young tech-savvy customers and create immersive and more personalized customer experiences. The metaverse may allow financial companies to provide seamless banking solutions by achieving greater alignment between online and offline services. For example, services that are usually offered offline such as customer consulting and due diligence for real estate investments can be moved online to the metaverse according to a report by a research arm of Hana Bank.

Likewise, financial companies in Korea are seeking ways to take advantage of the metaverse in the areas of product advertising, customer service, and employee training. Hana Bank, a local commercial bank in Korea, built a virtual training center where newly hired employees are to be trained. Standard Chartered Bank Korea is having a seminar on wealth management in a virtual setting where avatars would welcome participating customers. Many financial groups are also planning to open virtual branches dedicated to offering digital services to customers.

The value and business benefits that the metaverse can deliver are increasingly more enticing, and technological advances are opening the way for metaverse-driven innovation in the financial industry. In particular, financial firms are likely to make the most of the metaverse to provide better customer services. Improving the customer journey and providing a positive customer experience is one of the most important goals for financial companies, and the metaverse may be a powerful tool to achieve that goal.