[Weekly Review] COVID-19-Induced Employment Cliff and Real Economy Deterioration... Only Household Loans Surge

[Asia Economy Reporter Kim Eun-byeol] Due to the employment cliff caused by the spread of the novel coronavirus infection (COVID-19), the number of employed people in October significantly decreased for the first time in six months. The unemployment rate also soared to its highest level since October 1999 (5.0%), right after the International Monetary Fund (IMF) financial crisis, except for the same level recorded in October 2000.

Although domestic demand indicators such as industrial production, consumption, and investment have improved, employment indicators have shown sluggish results, causing the government to worry about the discrepancy with the real economy. The uncertainty surrounding our economy is gradually increasing. Meanwhile, household loans in the banking sector, which seemed to have stalled, increased again by more than 10 trillion won in just one month. Due to low interest rates, the money supply in the market increased by as much as 14.2 trillion won in September.

COVID-19-Induced Employment Cliff... Unemployment Rate Hits Highest in 20 Years

There was hope that the unemployment rate would improve as the spread of COVID-19 seemed to slow down, but employment indicators did not reflect this. According to the 'October Employment Trends' released by Statistics Korea on the 11th, the number of employed people last month was 27,088,000, a decrease of 421,000 compared to a year earlier. This is the largest decline since April (-476,000) and marks the second consecutive month of an increasing decline. The number of employed people has decreased for eight consecutive months: March (-195,000), April (-476,000), May (-392,000), June (-352,000), July (-277,000), August (-274,000), September (-392,000), and October. This is the longest period of decline since January-August 2009.

The employment slump among the youth is particularly severe. By age group, those aged 60 and over increased employment by 375,000, but those in their 30s (-240,000), 20s (-210,000), 40s (-192,000), and 50s (-114,000) all saw decreases. The number of young people who consider themselves close to being unemployed is the highest since statistics began. The expanded youth unemployment rate (Employment Supplementary Indicator 3), which includes not only the unemployed but also those who believe they can work more hours than they currently do, rose to 24.4% last month, up 3.9 percentage points from the previous year. This indicator, compiled since January 2015, reached its highest level for the same month on record.

The number of temporarily laid-off workers increased by 190,000 from the previous year to 497,000, the highest number recorded for the same month since 1982 when data collection began. Temporarily laid-off workers are classified as employed because they are resting with the expectation of returning to work, but if the unpaid leave period extends beyond six months, they are reclassified as unemployed or economically inactive. This is why they are called the "time bomb" of the labor market.

Greenbook: "Real Economy Deteriorates for Two Consecutive Months"

Although domestic demand indicators such as industrial production, consumption, and investment have recently improved, the severe slump in employment has increased government concerns about the economic outlook. The November issue of the Recent Economic Trends (Greenbook) published by the Ministry of Economy and Finance included the phrase "continued uncertainty" for the second consecutive month.

The Ministry of Economy and Finance diagnosed, "While the recovery of service and employment indicators remains constrained, uncertainty in the real economy continues due to the global spread of COVID-19."

The atmosphere confirming an economic rebound is gradually fading. The average daily exports in October increased by 5.6% compared to the same period last year, marking a positive figure for the first time in nine months. The three major indicators of industrial activity in September?production, consumption, and investment?also showed a "triple increase" for the first time in three months since June. However, the employment market continues to show sluggishness, creating a gap with the real economy.

Stalled Banking Sector Household Loans Increase Again by Over 10 Trillion Won

The previously stalled growth in household loans has expanded again. In October, household loans in the banking sector exceeded 10 trillion won, surpassing the increase from the previous month and marking the largest increase for any October on record.

According to the 'Financial Market Trends in October' released by the Bank of Korea, bank household loans (including policy mortgage loans) increased by 10.6 trillion won last month due to seasonal funding demand, expanding from the previous month's increase of 9.6 trillion won. Although bank household loan growth slowed in September compared to August, it increased again in October. Comparing only the increase in household loans for October, this is the largest increase since the Bank of Korea began issuing preliminary reports in 2004. The previous record was a 9 trillion won increase in October 2015.

Mortgage loans increased by 6.8 trillion won due to demand related to home purchases and jeonse (long-term deposit lease) as well as the execution of previously approved group loans. Other loans increased by 3.8 trillion won. Both mortgage and other loans recorded their largest October increases since 2015 (6.9 trillion won) and 2018 (4.2 trillion won), respectively.

Corporate loans in banks increased by 9.2 trillion won in October. Loans to large corporations increased by 1 trillion won, while loans to small and medium-sized enterprises increased by 8.2 trillion won.

Due to the impact of low interest rates, loans have surged, steadily increasing the money supply in the market. According to the Bank of Korea, the broad money supply (M2, seasonally adjusted, average balance basis) in September was 3,115.8 trillion won, an increase of 14.2 trillion won (0.5%) compared to the previous month (3,101.6 trillion won). This is 9.2% higher than the same month last year.

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