[Weekly Review] Increased Possibility of Gyeonggi Recovery?..."Wuhan Pneumonia as a Variable"

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[Asia Economy Reporter Joo Sang-don] Domestic production, consumption, and investment indicators have shown improvement for two consecutive months recently, strengthening expectations for an economic rebound. However, concerns are growing that external adverse factors, such as the spread of the novel coronavirus infection (Wuhan pneumonia), could hamper the Korean economy.

◆'Triple Increase' for Two Consecutive Months, but...= Following November last year, December also saw a 'triple increase' with simultaneous improvements in key industrial activity indicators such as production, consumption, and investment. In December, total industrial production rose by 1.4%, retail sales by 0.3%, and facility investment by 10.9%. The leading index's cyclical component, which predicts economic trends, increased by 0.4 points from the previous month, marking the fourth consecutive month of growth, and domestic machinery orders, a leading indicator, jumped by 40.9%. Regarding this, Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, stated on his social media (SNS) that "clear signs of economic improvement are appearing" and added, "We will use these signs of economic improvement as a definite momentum for economic recovery."

The problem lies in external adverse factors that limit policy responses. In particular, as the novel coronavirus infection (Wuhan pneumonia) rapidly spreads in China, where Korea's export dependency is high, unlike the 2003 Severe Acute Respiratory Syndrome (SARS) which only adversely affected the service sector, there are forecasts that even manufacturing could be shaken. The prolonged conflict between the U.S. and Iran is also increasing uncertainty. Joo Won, head of the Economic Research Department at Hyundai Research Institute, predicted, "The impact of the novel coronavirus will be reflected from the January industrial production index this year," adding, "While SARS was limited to the service sector, this time negative effects on manufacturing are inevitable." Professor Kim So-young of Seoul National University's Department of Economics diagnosed, "Due to the economic slowdown in China caused by Wuhan pneumonia this year, it is inevitable that Korea's exports, tourism, and consumption sectors will be adversely affected, making it difficult to expect a significant rebound in industrial indicators."

◆Korea's Economic Fundamentals 'Potential Growth Rate' Plummets= According to statistics from the Organisation for Economic Co-operation and Development (OECD), Korea's potential growth rate this year is 2.5%, down from 2.7% last year. The OECD estimated the potential growth rate through the economic outlook announced in November last year. In May last year, the OECD had forecast Korea's 2020 potential growth rate at 2.6%, but it was revised downward by 0.1 percentage points in just six months. Korea's potential growth rate is expected to fall further to 2.4% next year. This means the OECD's estimated potential growth rate for Korea has been declining year by year.

The decline in Korea's potential growth rate is also notable compared to other OECD countries. The 2021 potential growth rate dropped by 0.7 percentage points compared to 2017, when Korea's economy peaked at a potential growth rate of 3.1%. This is the third largest drop among the 35 OECD member countries excluding Turkey. Only Ireland (-3.0 percentage points) and Iceland (-0.9 percentage points) experienced a larger decline than Korea. Compared to 2019, only three countries?Turkey (4.4%→4.0%), Ireland (4.0%→3.4%), and Iceland (2.9%→2.5%)?saw their potential growth rates fall faster than Korea's this year.

◆R&D Allows Up to 3 Months of Special Overtime Work= The 'Amendment to the Enforcement Rules of the Labor Standards Act,' which expands the reasons for approval of special overtime work, came into effect on the 31st of last month.

Until now, employers could only use the special overtime system with approval from the Minister of Employment and Labor in very limited cases such as natural disasters or social disasters. These include typhoons, heavy snowfalls, chemical accidents, avian influenza (AI), and foot-and-mouth disease. Last year, the Ministry of Employment and Labor recognized Japan's export restrictions and African swine fever (ASF) as social disasters, allowing special overtime work. The recent amendment expanded the reasons for approval of special overtime work.

In addition to existing approval reasons such as disasters or equivalent accidents, the amendment added ▲cases requiring urgent measures to protect human life and ensure safety ▲unexpected situations such as facility or equipment failures ▲cases where a significant business disruption or loss would occur if increased workload is not handled within a short period ▲research and development (R&D) of materials, parts, and equipment or R&D recognized as necessary for strengthening national competitiveness and economic development. For R&D, special overtime work can be applied for up to three months per application, and the usage period can be extended after review, including confirmation of measures to protect workers' health.

◆'Digital Tax' to Also Be Imposed on Mobile Phone, Clothing, and Automobile Companies= The so-called 'Google tax,' a digital tax, will also be imposed on global companies in the mobile phone and automobile sectors. If the final plan is confirmed by the end of this year, it could become a burden for Korean companies such as Samsung Electronics, LG Electronics, and Hyundai Motor. In particular, since taxing rights will be allocated to market jurisdictions, concerns are rising about a potential crisis in domestic tax revenues.

According to the Ministry of Economy and Finance on the 31st, the Organisation for Economic Co-operation and Development (OECD) held the 'BEPS Inclusive Framework' steering committee and general meeting in Paris, France, from the 27th to the 30th (local time), with participation from 110 countries, where they agreed on the basic framework and future plans.

Participating countries agreed to discuss the digital tax through two approaches. The first is to impose a digital tax on a portion of the global profits of multinational enterprises above a certain scale. The applicable industries are digital service businesses and consumer-targeted businesses. The second is to introduce a global minimum tax. This involves taxing global companies' income above a certain level through methods such as income inclusion, reallocation of taxing rights, exclusion of deductions for base erosion costs, and denial of tax treaty benefits. A Ministry of Economy and Finance official said, "Whether domestic companies will be subject to this, the total tax revenue, and changes in individual companies' tax burdens will be concluded based on detailed issues to be discussed later," adding, "Technical details are likely to continue to be discussed after the end of the year. We will do our best to secure national interests, including securing tax revenue and minimizing domestic companies' tax compliance costs."

This content was produced with the assistance of AI translation services.