■ In South Korea, real private consumption appeared lethargic in 2023 due to the stagnation in real purchasing power, driven by a sharp rise in consumer prices (3.4%) and a decline in the real economic growth rate (1.4%). - In both 2022 and 2023, the growth rate of real purchasing power stagnated due to falling real income relative to consumption. This slump resulted from the sharp rise in international oil prices in 2022 and the marked decline in semiconductor prices in 2023. - Additionally, the steep upward trend in consumer prices triggered the adoption of a high-interest rate policy, further exacerbating sluggish private consumption (see Current Affairs I). ■ Going forward, the conditions for real private consumption are projected to gradually improve as the real economic growth rate expands and the value of income relative to consumption increases. - A majority of forecasting agencies project the economic growth rate to rise to the mid-2% range in 2024, bolstered by a rapid increase in exports, higher than the 2023 figure (1.4%). - Furthermore, in 2024, the capacity to spur private consumption is expected to experience meaningful expansion as real purchasing power substantially improves due to the marked rise in semiconductor prices. - However, high interest rates, outside the purview of this report, are still expected to act as a delaying factor for the recovery of private consumption. ■ Therefore, it is assessed that the current situation does not require short-term macroeconomic policies to stimulate private consumption. - Given the high probability of gradual moderation in consumption stagnation propelled by improving real purchasing power, it is not advisable to consider stimulus measures as requiring urgent action. It is also noteworthy that such policies could disrupt the ongoing trend toward inflation stabilization, potentially delaying interest rate cuts. - In addition, given that the trends of private consumption and income eventually sync up, the policy focus should be structural reforms that improve income-generating capacity by boosting medium- to long-term economic dynamism.

Analyzing Defined Contribution Pension Reform in Korea Using a General Equilibrium Model / SEUNG-RYONG SHIN Korea’s National Pension Fund (NPF) is projected to be in deficit by the 2040s and exhausted by the 2050s. Increasing contribution rates may be unaffordable, prompting consideration of structural reforms, particularly shifting from a defined benefit (DB) to a defined contribution (DC) system. The DC system links benefits to contributions and investment returns, ensuring financial stability but raising concerns about income adequacy and redistribution. This study uses an overlapping generations model with heterogeneous agents to assess these reforms. By 2070, demographic changes will make the DB system unsustainable without substantial government subsidies, adversely affecting taxes, income, and savings. Conversely, the DC system would remain balanced without subsidies, resulting in lower interest rates, higher wages, and better economic output. The model shows that the DB system would require an annual subsidy of 11.3% of GDP at a 9% contribution rate by 2070, while the DC system would be self-sufficient. Even with lower returns, the DC system could be more efficient and equitable with partial subsidies, improving economic outcomes and reducing inequality. Post-closure Career Paths of Self-Employed Workers / MINSUB KIM This study documents self-employed workers’ characteristics associated with their career paths after a business closure in order to improve employment insurance for such workers. Utilizing work history data from the Korean Labor & Income Panel Survey, a competing-risks regression model is adopted in order to study how self-employed workers’ career paths after unemployment (i.e., business closure) vary according to their characteristics. The findings suggest that the post-closure career paths of self-employed workers are associated with (i) their revenue and income, (ii) the individuals’ demographic characteristics, and (iii) the industry in which they operate. Several policy implications for employment insurance that better caters to the needs of self-employed workers are derived from the empirical results. Product Pioneers and Followers’ Choices on New vs Existing Plant to Product New Products: Evidence from Korean Manufacturing and Implications on Learning Spillovers / Chin Hee Hahn This paper examines whether product pioneers differ from product followers in their decision to establish a new plant to product a new product, utilizing a firm-plant-product dataset for Korean manufacturing from 1990 to 1996. We find that followers are more likely to establish a new plant rather than utilize existing plants to product a product which is new to the plant. We also find that establishing a new plant is accompanied by a larger investment than utilizing existing plants. These results seem consistent with the existence of pioneer-to-follower learning spillovers, possibly in the sense that followers face less uncertainty about the future profitability of the new product. The changing relationship between labor market conditions and inflation in Korea / Joonyoung Hur·Minsok Chae This paper examines the time-varying relationship between the labor market, inflation, and monetary policy, particularly in light of recent high inflation and a tight labor market, with a focus on data from Korea. Analyzing data from July 2009 to June 2023, we find that the impact of the job vacancy rate ― an indicator of labor market conditions ― on inflation has gradually increased over time. Furthermore, the responsiveness of inflation to changes in labor market conditions is found to be greater during periods of high inflation compared to low inflation. Lastly, the influence of monetary policy changes on the job vacancy rate is particularly pronounced during recessionary periods and after the COVID-19 pandemic. These findings suggest the possibility of convexity in the relationship between the labor market and inflation in Korea. In such a scenario, raising interest rates during high inflation could lead to a relatively larger decrease in inflation than in job vacancies, which could create a favorable situation for monetary policy management.

Ⅰ. Current Economic Conditions □ The Korean economy is slowing down further due to sluggish exports as external conditions deteriorate. GDP growth for Q4 saw a decrease of 0.4% quarter on quarter, driven by private consumption slowdown and export contraction. As the global economic downturn dragged down export by a huge falloff, especially in semiconductors, domestic demand had a limited recovery on persistent high inflation and interest rates. The global economy is slowing down with a decline in trade, and China is facing a temporary setback as the COVID-19 pandemic rapidly spreads after lifting restrictions. □ At the same while, there is growing anticipation for an economic recovery backed by improving economic sentiment in China and a gradual decline in inflation in major countries. In light of favorable weather conditions in Europe and the widespread effects of stringent monetary policy, energy prices are decreasing and inflation in major nations is receding. Positive signals of future global economic recovery are emerging, including the weakening dollar due to declining expectations for a rate hike in the US and improved economic sentiment following China's resumed economic activity (reopening). □ The Korean economy is expected to experience a deeper slowdown in the first half of 2023, before gradually recovering in the latter half. Due to China's resumed economic activity leading to a temporary increase in infections and economic contraction, the growth of the Korean economy in the first half may underperform the previous projection. Conversely, a rebound of China's economy may positively impact Korea's exports in the latter half, potentially driving economic growth beyond previous projections. Ⅱ. 2023 Domestic Economic Outlook 1. Assumed External Factors □ The global economy is expected to slow down in 2023. The IMF projects its world economic outlook in 2023 to fall from 3.4% in 2022 because of stringent monetary policies. However, its 2023 outlook has been slightly revised upward to 2.9% from the October projection of 2.7%, considering the effect of China's reopening efforts. □ Crude oil price (Dubai) is expected to drop by 17% from 2022 ($96 per barrel), marking around $80 per barrel in 2023. □ The value of the Korean won, in terms of the real effective exchange rate, is expected to appreciate by about 4% in 2023, reflecting a weaker dollar in recent months. 2. Domestic Economic Prospects □ Whereas the estimate for private consumption growth is slightly lower than the earlier outlook, the Korean economic outlook remains unchanged at 1.8% as the export slump eases due to the rebounding global economy. The economy is expected to see a deeper slowdown in the first half of 2023 followed by a faster recovery in the latter half, keeping the annual growth outlook unchanged from the previous projection. Private consumption is projected to increase by 2.8%, lower than the previous projection (3.1%), due to the decrease in real income caused by the increase in public utility rates. Facilities investment is anticipated to rise by 1.1%, a slight upward revision from the previous projection (0.7%), due to improving external conditions. Meanwhile, the estimate for construction investment remains unchanged. Exports are expected to see a 1.8% increase, up from the previous projection (1.6%), mainly driven by the growth of service exports resulting from a surge in Chinese tourists and China’s reopening. □ The current account surplus is projected to reach $27.5 billion in 2023, higher than the earlier projection ($16.0 billion), reflecting the upward adjustments in export growth as well as terms of trade driven by falling oil prices (a larger decrease in import prices). □ Despite the downward adjustment of global oil prices, headline inflation is expected to reach 3.5% in 2023, up from the previous projection (3.2%), due to the deferred impact of supply-side inflationary pressure on public utility rates. □ The number of employed is anticipated to rise by 100,000 in 2023, up from the earlier projection (80,000), reflecting the growth in the domestic face-to-face service industry backed by China’s reopening. 3. Risks to the Outlook □ Suppose sustained economic recovery in China or extended rate hikes against persistent high inflation, and it may hamper the pace of economic recovery in Korea. Considering the potential impact of China’s economic recovery on Korea’s rebound in the latter half, if China’s efforts to contain the spread of COVID-19 prove ineffective or if a setback in the real estate market causes a ripple effect on economic activity, Korea may experience a slower-than-anticipated growth due to a delayed recovery in exports. In the event that the decline in inflation slows due to risks like the escalating Ukraine crisis, US-led global trends in monetary policy may get tighter, destabilizing financial markets and limiting the pace of recovery in the world economy. □ Domestically, if the decline in the real estate sector spills over into the real economy, Korea’s economic growth could be hindered, particularly inprivate consumption and construction investment.