Tightening consumption to hurt rebound momentum

A man walks past a shuttered store in Seoul. Korea Times file

By Lee Kyung-min

Consumption contracted in October, a troubling indication that the economy is likely to take a turn for the worse following the recent implementation of strengthened social distancing rules certain to chill consumer sentiment, data showed Monday.

A recovery in the services industries driven by eased social distancing rules in the two previous months failed to offset a slowdown in manufacturing, dashing hopes of an earlier-than-expected economic recovery indicated in September when industrial output, consumption and investment all showed a solid increase.

Economists say the worst has yet to come, given the heightened social distancing measures following new virus cases topping 400 per day, a shaky drawdown from 500 per day from Nov. 26 and 28.

“A rise in the social distancing level will again hit consumer sentiment,” Seoul National University economist Kim So-young said.

“The August rally in Seoul led to a significant drop in sales for many small and medium-sized enterprises (SMEs) and operators of eateries as well as many others in the services industry will see the difficulty repeated.”

Statistics Korea showed overall industrial output remained unchanged in October from a month earlier.

By sector, the combined average in production for the mining, manufacturing, gas and electricity industries sank 1.2 percent, led by a drop in production of semiconductors and liquid crystal displays (LCD).

Retail sales declined 0.9 percent and facility investment fell 3.3 percent month-on-month.

October figures advance views that the much-awaited recovery will hinge heavily on consumption; one of three key components that determine the country's growth. Of the other two components, investment will likely have limited swings and exports seem in better shape than expected.

“Growth prospects will be steered mostly by consumption, which I am afraid is certain to lose steam if Level 2 measures are extended to greater areas and stay in place longer,” Kim said.

The government should promptly roll out measures to contain the further spread of the virus while putting in place the current limit on the use of government-issued, consumption-bolstering coupons, Yonsei University economist Sung Tae-yoon said.

“The first thing to be done is suspending the incentives of going to large gatherings for free or discount coupons that can be used at large cinemas or restaurants, which should be followed by other ways to keep the consumer sentiment from taking a sharper-than-expected fall," Sung said.

“Exports seem to be in better shape than previously thought, so government efforts should turn instead to improving domestic consumption,” he added.