Rise of savings rate reflects fall of consumer confidence

By Choi Sung-jin

The total savings rate has risen for four consecutive years, indicating that Koreans are not loosening their purse strings, preferring instead to prepare for an uncertain financial future, officials said Monday.

“Unlike in the past, the rising savings rate is not so welcome,” said an official at the Bank of Korea. “At a time when the nation has to worry about the low growth becoming a new normal, the rising savings rate and shrinking consumption could dampen the economy further.”

According to the central bank, the total savings rate rose from 34.2 percent in 2012 to 34.3 percent in 2013, 34.7 percent in 2014 and 35.8 percent on average until the third quarter of last year. The total savings rate is a sum of all saving rates in the country – total disposable income minus consumption expenditure - by government, businesses and households.

The biggest increase was in the household savings rate, which more than doubled, from 3.4 percent in 2011 to 7.1 percent in 2014, according to the report.

Korean families are trying to watch every penny amid stagnant income growth and increasing nervousness about their financial future, it said. Heavier burdens to repay principals and interests for bank loans have also helped to increase their savings.

“The rise of the household savings rate is no doubt a positive factor because it helps to raise potential growth rate,” said Lim Jin, a researcher at Korea Institute of Finance. “The recent increase of the savings rate, however, reflects in part the uneasiness felt by households, possibly leading to shrinking consumption and slumping domestic demand.”

To perk up the dormant demand, the government went all out to enliven it last year, formulating an extra budget, holding a Korean version of a Black Friday event and lowering individual consumption tax, reversing 0.2-percent drop in consumption growth in the second quarter to 1.1-percent increase in the third quarter.

However, the consumption growth was followed by a proportional increase of debt. The outstanding amount of credit sales, such as credit-card sales and installment purchases of cars, in the third quarter rose by 3.9 trillion won ($3.25 billion), nearly four times higher than the 500 billion won in the second quarter. The total savings rate even increased from 35.3 percent to 35.8 percent during the same period, meaning that families have increased their consumption mostly by extending debt.

Yet there are clear limitations to the government’s bolstering of domestic demand through temporary policies and one-off events while household incomes are recording small or no growth, according to financial professionals. “Without the backup of income growth, consumption is bound to fall again widening only the fluctuations of demand,” said an analyst at a local brokerage.

Others are more pessimistic and have expressed concerns about a possible“consumption precipice,” which is a plunge of private spending after a short-lived increase mostly owing to government’s artificial boosting.

In order to boost consumption fundamentally, the government should implement policies to enhance household incomes. “In the case of low-income families, the government ought to help them accumulate income considering their debts and post-retirement living costs,” said the analysts. “In the case of high-income families, policymakers need to induce them to increase their spending at home rather than abroad.”