Consumer Recession Chills Economy
By Kim Jae-kyoung
Staff Reporter
Korea is facing a consumer recession, with ongoing troubles in equity and property markets sending consumer confidence into tailspin, evidence that the economy is heading south for a hard landing.
Consumer confidence has fallen to depths previously reached only in the first quarter of 1999, just after the 1997-1998 financial crisis, which was a period of recession in Asia's fourth largest economy.
In a November survey of 2,200 households in 30 cities, the Bank of Korea (BOK) found that its consumer survey index (CSI) for the consumer spending outlook came in at 94, the lowest level since the first quarter of 1999 when it also reached 94.
This was the first time for the index to fall below the benchmark 100 since the fourth quarter of 2004, when it reached 97.
The CSI measuring expectation for job opportunities dipped to 50, the lowest since the fourth quarter of 1998 when it stood at 33. The index measuring overall consumer sentiment also dropped to 84, the lowest level since July.
Market analysts said that a toxic mixture of asset deflation and recession fears had a negative effect on consumers' view of their families' financial situation and future job prospects.
``We attribute the November plunge in consumer sentiment to the panic that has gripped financial markets,'' ING Group Asia chief economist Tim Condon told The Korea Times.
``We expect sentiment to bounce when the panic fades.''
Consumer recession is seen as a harbinger of a deeper economic downturn as shrinking consumption will affect the economy through multiple channels ― growth, unemployment and business spending.
In particular, given that market jitters are still lingering, consumer confidence is likely to get worse going forward, putting further constraints on the faltering economy.
``I think the biggest downside from here is actually consumption. This is only the beginning of a consumption downturn in Korea, which could last until the third quarter of next year,'' Morgan Stanley Asia chief economist Sharon Lam said.
She pointed out that overspending over the past year, currency depreciation and falling asset prices together with rising unemployment will dampen consumption. Lam forecast consumption to contract 0.5 percent in 2009 year-on-year, the first negative growth since the credit card bubble burst in 2003-2004.
David Mann, head of Korea Research at Standard Chartered Bank, said, ``The worst point for the consumer is expected to be reached sooner rather than later in 2009.
``However confidence can have large swings and we expect supportive government policy to help consumers avoid a deep downturn,'' he added.
The Korean economy grew 0.6 percent in the third quarter from a quarter ago, the slowest growth in four years, in line with sluggish private consumption. Household spending contracted 2.4 percent, the lowest since 2003.