Gross National Income Drops Most Since IMF Crisis (Comprehensive)

Reduced Money in Hand Likely to Decrease Consumption
Last Year's Government Total Savings Rate Declined... Impact of Money Injection to Prevent Economic Downturn

[Asia Economy Reporter Kim Eun-byeol] The gross national income (GNI) that citizens receive in their hands in the first quarter of this year shrank at the largest rate since the foreign exchange crisis, as the economy contracted due to the novel coronavirus infection (COVID-19) and low inflation also had an impact. The gross domestic product (GDP), adjusted for inflation, also declined at the largest rate since the financial crisis. This trend is expected to continue into the second quarter. The Bank of Korea forecasted that the growth rate for the second quarter will record around -2% in the mid-range.

◆Gross National Income Shrinks at the Largest Rate Since the Foreign Exchange Crisis= On the 2nd, the Bank of Korea announced in the 'Preliminary Gross National Income for Q1 2020' that the nominal GDP growth rate adjusted for price changes in the first quarter recorded -1.6% compared to the previous quarter. This is the lowest since the fourth quarter of 2008 (-2.2%) during the global financial crisis. As a result, the 'GDP deflator,' which is nominal GDP divided by real GDP, recorded -0.6%, marking five consecutive quarters of negative growth. The GDP deflator is an indicator representing the overall price level of the national economy and is at its longest period of negative growth in history.

The first quarter GNI, which is the income earned by citizens, also decreased by 2.0% compared to the previous quarter, recording 481.3973 trillion won. This is the largest decline since the second quarter of 1998 (-3.6%) during the foreign exchange crisis. Since the money available for citizens to spend has decreased, it could eventually lead to a reduction in consumption.

Amid a low-growth and low-inflation trend, some voices express concerns about deflation (price decline during economic recession). Park Yang-su, head of the Economic Statistics Bureau at the Bank of Korea, said, "Policy authorities should be alert to the possibility of deflation." However, he added, "The recent reduction in the decline of the GDP deflator is a positive factor." The Bank of Korea and the government consider the domestic consumer price trend more important than the GDP deflator, which includes semiconductor export prices.

With the sharp drop in GNI, there is interest in whether the annual per capita GNI will maintain the $30,000 level this year. Last year, the per capita GNI in dollar terms was $32,115, a 4.1% decrease from the previous year. This is the largest decline in 10 years. Park said, "Assuming nominal GDP decreases by 1% and the GDP deflator remains at a similar level to last year, if the won-dollar exchange rate does not exceed 1,250 to 1,260 won after June, the $30,000 level can be maintained."

The Bank of Korea expects the growth rate to hit bottom in the second quarter, considering the impact of COVID-19. Last week, the Bank of Korea forecasted a growth rate of -0.5% for the first half of this year. Taking this into account, the second quarter growth rate could be lower than -2%. Factors that could influence future growth rates include ▲the visibility of effects from the first supplementary budget and disaster relief funds ▲export trends due to the US-China trade dispute ▲the degree of COVID-19 resurgence.

◆Last Year’s Total Savings Rate Decreased to 34.7%= Meanwhile, the total savings rate compiled by the Bank of Korea last year was 34.7%, marking the first decrease in the government’s total savings rate since statistics began to be compiled. The cause was that consumption exceeded income earned by the private sector and government. While the private savings rate maintained its previous level, the government’s savings rate sharply dropped from 8.2% in 2018 to 6.9%.

The share of workers and households in total income of companies, government, and citizens increased. The 'labor income share,' which is the proportion of labor income (employee compensation) in workers’ and national income, recorded 65.5% last year, the highest since statistics began in 1953. Operating surplus, which indicates corporate profits, decreased for two consecutive years for the first time since statistics began, while the growth rate of employee compensation (3.4%) exceeded that of GNI (1.6%).

Park said, "It is true that some policies related to income-led growth have influenced the rise in the labor income share, but it is difficult to say to what extent."

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