By Kim Jae-kyoung
Staff Reporter
A deadly cocktail of recession fears and subsequent plunge of asset values ― stocks and real estate ― have sent consumer confidence into a tailspin, fanning worries that Asia's fourth largest economy is slowly slipping into recession.
The accelerating downturn in consumer confidence is seen as a harbinger of a deeper economic downturn, with shivers expected to affect the economy through multiple channels ― growth, unemployment and business spending.
In a third-quarter survey of 2,200 households in 30 cities, the Bank of Korea (BOK) found that its consumer survey index (CSI), measuring overall consumer sentiment, fell to 88 from 96 in the second quarter. This is well below the benchmark 100, meaning that pessimists outnumber optimists.
The CSI for economic conditions for the coming six months also fell to 61 from 82 a quarter ago, while the index measuring expectation for job opportunities dipped to 60 from 80.
In particular, the index for future spending on dining-out and travel fell to 76 and 71, respectively, from 83 and 80, suggesting that consumers will further tighten their purse strings in the months to come.
``Consumer sentiment was severely dampened by falling asset values following the financial turmoil triggered by growing jitters over a global recession,'' a BOK official said. The KOSPI has lost more than 45 percent of its value so far this year, while the local currency has declined about 35 percent against the U.S. dollar.
The BOK's largest-ever rate cut Monday was a preliminary action to prevent falling consumer sentiment from spilling over into other sectors of the economy. The central bank slashed its base rate by 0.75 percentage points to 4.25 percent.
The central bank's decisive action illustrates its concerns over the worst-case scenario where stalled consumer spending leads to businesses reducing investment, and job losses. This means that banks will suffer a new set of credit losses in areas such as consumer and commercial property loans, which will feed back into the financial markets.
``The rate move confirms that the central bank's dominant concern at this point is growth rather than inflation,'' Goldman Sachs analysts Kwon Goo-hoon and Eva Yi said in a research note.
``We expect the government to speed up the implementation of a large-scale fiscal stimulus and to continue undertaking proactive monetary easing,'' they added.
Weighed down by sluggish domestic demand and slowing exports growth, the economy expanded 0.6 percent between July and September quarter-on-quarter, the weakest growth in four years. Exports of goods contracted 1.8 percent during the period, while private spending grew only 0.1 percent.
Consumer spending will likely further contract in the coming months as the number of new job offerings rose by only 112,000, or 0.5 percent in September, the lowest figure since February 2005 and falling way short of the government target of 200,000.
In the meantime, the U.S. economy is showing clear signs of entering a deep recession, with massive layoffs arriving in force. A number of giant U.S. firms, including Yahoo, General Electric, Coca-cola, Goldman Sachs, Bank of America and Xerox, have recently announced their intention to cut jobs.
kjk@koreatimes.co.kr
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