By Yoon Ja-young
Concern over a sharp drop in consumption is darkening the economy as households are piling up cash amid uncertainties. Demographic change is also making a consumption rebound unlikely.
According to Statistics Korea, the average propensity to consume, or the ratio of consumption to disposable income, stood at 70.9 percent in the second quarter, which is the lowest since 2003 when it started compiling the data.
Meanwhile, households are increasing savings against expectation by the central bank which has been maintaining its key rate at the historically low 1.25 percent since June. The country’s household savings rate has been rising steeply from 3.9 percent in 2012 to 8.82 percent last year. It is expected to be 8.66 percent, which is the fifth highest among OECD member countries.
Analysts say that households are increasing savings due to uncertainties over the future.
“When people have a negative outlook on future growth, households decrease consumption while increasing savings. The move is based on concern that their income will decrease,” said Lee Geun-tae, an economist at LG Economic Research Institute. “The phenomenon is especially notable among young people who have longer time to earn money.”
It is expected to couple with the demographic structure to dampen consumption, he added. The country’s working age population is expected to start decreasing next year after peaking at 37 million this year. The population of people in their 40s, who are the biggest consumers, has already been decreasing since 2011.
Retail sales rose 1 percent in June from the previous month upon increasing sales of durable goods, but economists say such increase isn’t likely as the consumption tax cut on cars is over.
“Private consumption improved in the second quarter thanks to government policies to boost consumption, such as the consumption tax cut and designation of temporary holidays. However, the economy is repeatedly seeing a consumption cliff following expiration of such policies,” said Huh Moon-jong, a researcher at Woori Finance Research Institute. He added that the spontaneous recovery in consumption wasn’t big when excluding the policy effect.
The researcher said consumption isn’t likely to maintain a recovery when considering structural limitations, pointing out sluggish income growth as a fundamental problem. Monthly earned income of households averaged 3 million won in the first quarter, up a mere 0.3 percentage points from a year ago. That is much lower than a 3.8 percentage point increase in the first quarter last year or the 0.9 percentage point rise seen in the fourth quarter last year.
He pointed out that employment is picking up, but mostly for senior citizens. “It means household income and capacity to consume aren’t improving notably.”
Household debt is also working as a shackle for consumption. “Despite the low interest rate, the burden of paying back debts and rising housing costs, which have been structural hindrances for household consumption, haven’t turned for the better,” the analyst said.
The country’s housing market is seeing a rapid transition to monthly rent from the unique jeonse system, where tenants could rent a home for two years by offering a lump-sum deposit without the burden of paying monthly rent. The increasing monthly rent is leaving tenants, who represent mostly low-income households, with less room for consumption.
The finance ministry has shown concerns over the second half of this year. “The recovery in domestic demand is likely to be limited following expiration of a consumption tax cut on cars, amid downward risks such as Brexit and corporate restructuring,” it noted in the Green Book, a monthly economic assessment report.
Some fear that the implementation of the anti-graft law will also dampen consumption. The so-called Kim Young-ran Act, which is to take effect Sept. 28, limits the free meals and gifts that public officials, journalists and private school teachers can receive.