South Korea regained its position as the world’s 11th-largest economy in 2015.
Its gross domestic product ranking had peaked at 11th place in 2006 but dropped to 13th in 2007 and 15th in 2008. It was 14th from 2009 to 2013 and 13th in 2014.
However, the higher ranking is not that meaningful as the country’s competitors face unusual economic situations.
Russia (10th in 2014) and Australia (12th in 2014) suffered slowdowns in due to the big drop in raw materials prices, one of their main growth engines. Last year, Russia and Australia ranked 12th and 13th, respectively.
Furthermore, Korea’s GDP actually fell to $1.37 trillion in 2015, down 2.4 percent from $1.41 trillion a year earlier.
The global ranking of its per capita gross national income also showed that Korea cannot be satisfied with the GDP ranking of 11th place as its purchasing power has made little improvement.
Korea’s per capita GNI stood at 48th with $34,700 in 2015, down from the previous year’s 42nd place with $34,620.
This indicates that there was little progress in citizens’ purchasing power despite the expansion in the overall economy.
The nation’s rapidly climbing household debt is a key factor undermining the nation’s growth potential. Its significance is evident when the growth of the nation’s GDP and collective household debt is compared during the first quarter of 2016.
While GDP inched up 2.7 percent on-year during the first three months, the nation’s household debt surged 11.4 percent on-year, or 125.5 trillion won, to reach 1.223 quadrillion won. Its household debt is fast approaching its annual GDP, which amounted to $1.32 trillion last year.
It is undeniable that snowballing household debt has deteriorated citizens’ purchasing power, as the debt is blocking a rapid bounce back in private consumption, which takes up a large portion of GDP.
In addition, many debt-saddled households are taking additional loans from financial firms to secure cash to buy basic necessities or pay back some of their maturing debt. It is not easy to break out of the vicious circle in which debt is yielding more debt.
Recent data from the Bank of Korea has showed a sharp increase in loans issued by secondary financial firms. This is critical, as it means more households are no longer eligible to take loans from first-tier commercial banks.
Policymakers have somewhat contributed to this unfavorable situation. With outstanding mortgage loans shooting up last year amid President Park Geun-hye’s initiative to boost the real estate sector, the Financial Services Commission has been urging commercial banks to conduct rigid loan screening.
Throughout last year, the FSC played a core role in inducing a great number of households to take mortgages from the first-tier banking sector by easing regulations such as the loan-to-value ratio and debt-to-income ratio.
Eventually, a large portion of the middle-income bracket is thought to have resorted to second-tier lenders -- such as mutual savings banks and capital services firms -- which charge borrowers higher interest rates from 10 to 20 percent per annum.
A policy to boost private consumption in the long-term should start from inducing the soft landing of consumer debt.
