Korea's household debt likely to drag down economic growth

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By Lee Yeon-woo

Prof. Amir Sufi / Courtesy of the University of Chicago Booth School of Business

Korea is at risk of entering a phase of low economic growth due to escalating household debt, which showed the second-largest rise in the world over the last seven years in terms of the ratio of debt to gross domestic product (GDP). This fact was highlighted recently in a working thesis released by the National Bureau of Economic Research (NBER).

In the paper, titled “Housing, Household Debt, and the Business Cycle: An Application to China and Korea,” University of Chicago Booth School of Business professor Amir Sufi addressed the potential future of the two countries if the current household debt situation continues.

Sufi noted that Korea's exceptionally high level of debt service ratio could pull its economy to low growth.

“Study shows that the effect of a large rise in the household debt service ratio has a large negative impact on real GDP growth. The transmission of higher interests into lower household spending will be a key factor to monitor for Korea to assess future GDP growth,” the professor wrote.

“Since 2015, the global debt service ratio has declined slightly by 0.2 percentage points. There has been a slight uptick in 2022, but it is not large. In contrast, the debt service ratio in Korea has risen by more than 2 percentage points from 2015 to 2022.”

He predicted that consumer spending could be quite weak in the country in the coming years due to the sudden and large rise in interest rates in 2022.

However, he assessed that Korea has a relatively low chance of encountering a severe financial crisis, thanks to its strong current account position. Countries that experience massive rises in household debt while running current account surplus still experience a decline in growth, but the decline is less severe than countries that run current account deficits, he explained.