Consumers Tightening Purse Strings
There appears to be no light at the end of the tunnel for Korea’s economy, buffeted by exterior factors such as high energy prices and a failure by the administration to give a clear direction out of the looming crisis. Not just domestic media but also foreign media such as The Financial Times paint a bleak picture for the world’s 13th largest economy that, by many indications, shows strong signs of stagflation. At this juncture, Korean consumers are trying to cope with the economic hard times by tightening their belts, cutting their spending where they can and getting tax reimbursements even for small expenses. More specifically, they are tightening their purse strings for overseas trip expenditures and getting cash payment receipts for insignificant purchases. These developments are coming against the background of yet another sign buttressing the unhealthy state of the economy with the number of self-employed enterprises dipping. The Korea Times financial reporter Kim Jae-kyung takes a look at these phenomena. ― ED.
Overseas Trips Down, Cash Receipts Up
By Kim Jae-kyoung
Staff Report
Korean consumers are tightening their belts both at home and abroad, as their income is declining in the midst of a deepening economic downturn and rising inflation.
On the domestic side, with a ceiling on cash payment receipt issuance removed, more consumers are demanding receipts on small-amount cash payments for taxable income deduction.
According to the National Tax Service (NTS), the number of cash payment receipts issued in July reached 311.93 million, up 98.5 percent from June.
The limit on the amount for receipt issuance was removed from July. Until June, a receipt was issued only on the purchase of a minimum of 5,000-won worth of goods and services.
Of the total receipts issued in July, those for less than 5,000 won came to 135.82 million, accounting for 43.5 percent of the total. The absolute cash payment receipt amount jumped by 15.7 percent to 5.01 trillion won last month from a month ago.
``With the limit on the issuance removed, more consumers are demanding receipts for taxable income deduction,'' an NTS official said.
``The sharp increase reflects consumers' efforts to save a penny amid the deepening economic downturn,'' he added.
The economic downturn has also forced Korean parents to cut back their spending on their children's overseas study and training, the key culprit behind the snowballing travel account deficit over the past few years. In the first half, Koreans' spending on this recorded the largest drop in 10 years.
According to the Bank of Korea (BOK), Korean parents sent a total of $2.25 billion to their children studying abroad during the first half of the year, down 5.3 percent from a year before.
It was the largest half-year decrease in 10 years and the first decrease in seven years since 2001.
After shifting to a sharp rise in 2001, the first-half overseas remittance for education and training jumped by $522.4 million in 2006 and $335.7 million last year.
On a year-on-year basis, the expenditure overseas grew 47.1 percent in 2002, 29.3 percent in 2003, 32.7 percent in 2004, 40.7 percent in 2005 and 34 percent in 2006. The growth rate slowed to 16.3 percent last year and turned negative this year.
The central bank said that the sharp increase in the July remittance was mainly due to the economic downturn coupled with a weaker currency. The Korean currency has fallen nearly 10 percent against the greenback so far this year.
``The first-half spending on overseas study and training had been on an upward trend but it fell dramatically in the first half of this year,'' a BOK official said.
Massive spending overseas accounts for much of Korea's travel account deficit, which in the second quarter of this year recorded $2.77 billion, down from $3.01 in the first quarter and $3.46 billion in the fourth quarter of 2007.
Korean consumers' belt-tightening moves are the result of falling income coinciding with rising inflation.
The nation's real income saw its biggest drop in five years between January and March, due to worsening trade conditions caused by skyrocketing oil prices.
The nation's gross national income (GNI) contracted 1.2 percent quarter-on-quarter, the largest quarterly setback since it posted a drop of 1.6 percent in the first quarter of 2003, according to the BOK.
Consumer prices rose 5.9 percent year-on-year in July, the fastest growth in 10 years, up from a 5.5 percent gain a month ago
The falling income coupled with high inflation is hurting domestic demand, sending consumer sentiment to its lowest level since the Asian financial crisis in 1998. The BOK's second-quarter consumer survey index (CSI), measuring predicted economic conditions for the next six months, plunged to 52, the lowest level in almost 10 years.
Private consumption contracted 0.1 percent in the second quarter from the previous quarter, the worst performance in four years since it shrank 0.1 percent in the second quarter of 2004.
As a result, the Korean economy grew at its slowest pace in one year in the second quarter. The nation's real gross domestic product (GDP) grew 4.8 percent in the second quarter from a year ago, the lowest growth rate since the first quarter of 2007.
Self-Employment Falls to 5-Year Low
The number of self-employed here has been falling rapidly, as many of them have gone out of business as a result of slackened domestic demand triggered by a deepening economic downturn.
According to the Ministry of Strategy and Finance and the National Statistical Office (NSO), Sunday, the number of self-employed came to 5.94 million in the first half, down 73,000 from a year earlier.
It was the lowest level in five years since 2003 when domestic demand hit rock bottom due to a credit card meltdown.
After peaking at 6.12 million in the first half of 2005, the number for the first six months declined to 6.11 million in 2006 and 6.01 million in 2007.
By category, the number of those running their own business with employees stood at 1.53 million in the first half, down 20,000 from a year before. The number of those without employees also fell by 52,000 to 4.41 million during the same period.
With a steady fall in the number of the self-employed, non-paid family member workers reached 1.36 million in the first half, down 36,000 from a year ago.
Market experts said that what is of more concern is that the surviving self-employed businesses are also suffering from a decline in revenue, raising concerns over more bankruptcies down the road.
According to the NSO, income for non-worker households, mainly the self-employed, grew 4 percent on average in the first quarter, falling short of the total households' 5 percent growth.
As a result, non-worker households' spending rose 2.4 percent, well below the total households' 5.3 percent expansion, meaning that the self-employed cut back their spending due to falling income.
The operating surplus for the self-employed ― income after everyday expenses ― stood at 83.27 trillion won last year, up only 0.9 percent from 82.52 trillion won a year ago.
After dropping 8.8 percent in 2002 and 0.9 percent in 2002, the operating surplus grew 1 percent in 2005 and 3.5 percent in 2006.
``Self-employed businesses have stayed in the doldrums as domestic demand is losing steam amid the sluggish job market,'' said an economist at the Korea Development Institute. ``This trend is likely to continue for a while due to the prolonged economic slowdown.''