Weakening consumption drags down Korean economy

Concerns are deepening that weakening domestic consumption will further drag down South Korea’s sluggish economy this year, offsetting any positive effect of a rebound in exports.

Experts caution that Asia’s fourth-largest economy may suffer from the worst slump in domestic demand since the 2008 global financial crisis.

According to the Korea Economic Research Institute, a private think tank, the country’s private consumption is projected to grow 1.7 percent in 2017, down from 2.4 percent last year.

Bank of Korea Gov. Lee Ju-yeol cited the slumping domestic consumption as a major reason for the central bank’s decision earlier this month to revise down its 2017 growth forecast for the Korean economy to 2.5 percent from the October prediction of 2.8 percent.

BOK data showed Tuesday the country’s overall consumer sentiment fell to the lowest point in nearly eight years this month.

“All factors that affect consumption seem negative now,” said Kim Kwang-seok, a professor at Hanyang University in Seoul.

Worsening employment conditions, declining property markets and resurging oil prices weigh on household spending, with many indebted households struggling to make interest payments.

The number of unemployed people exceeded 1 million for the first time last year, with the jobless rate standing at 3.7 percent.

The unemployment rate is expected to rise to a 15-year high of 3.9 percent this year, according to the Korea Labor Institute.

In a survey of 100 real estate experts, conducted by the Korea Development Institute last year, more than half of the respondents saw house prices would fall in the year ahead by up to 2.5 percent partly due to a series of measures taken by the government to curb rising household debt. Home prices increased 1.71 percent in 2014, 3.51 percent in 2015 and 0.71 percent last year.

“The slump in the housing market will result in evaporating the effect of inflated asset values on private consumption,” said Lee Geun-tae, an analyst at the LG Economic Research Institute.

He also said rising oil prices coupled with slowing economic expansion would drag down the growth of the country’s gross national income below 2 percent this year.

The decreasing number of marriages also has a negative impact on domestic consumption in Korea, as a couple spends about 52 million won ($44,600) on average in wedding and honeymoon costs.

With many young Korean men and women feeling less need to get married, the number of marriages in the country is estimated to have fallen below 300,000 last year for the first time since 1990, the first year when relevant data were available.

An anti-corruption law introduced last year, which puts a cap on the value of free meals and gifts offered to employees in government, media and schools, is also blamed for dampening domestic consumption.

In contrast to the slumping domestic consumption, the country’s exports have shown signs of recovery, increasing 25 percent from a year earlier in the first 20 days of this month.

Trade Ministry officials expect Korea’s outbound shipments to increase 2.9 percent for the whole of 2017, following two consecutive years of decline.

But any contribution to be made by exports to growth is set to be countered by a slump in domestic demand, which propped up the economy in the past couple of years.

Experts say the government should put policy focus on boosting domestic consumption to avoid the economy being drawn into a low-growth rut.

Finance Minister Yoo Il-ho said last week the government would draw up a large-scale supplementary budget if sluggish domestic demand pushed down first-quarter growth far below the target.

The government plans to frontload more than 30 percent of the budget for this year in the first three months of the year.

Experts noted corporate restructuring should be expedited to stabilize the job market along with measures to increase support for laid-off workers.

The country’s demographic changes may make it harder to bolster domestic consumption in the long term.

The working age group will begin shrinking this year due to the low birthrate and aging population, reducing overall purchasing power.

A reduction in the population of 40-somethings, who have a higher propensity to consume than other age groups, will have a more acute impact on consumer spending.

The number of people in their 40s, which peaked at 8.77 million in 2014, decreased to 8.68 million last year, according to Statistic Korea. The figure is forecast to further fall to 8.6 million this year.

The average monthly income earned by 40-something householders decreased by 0.03 percent from a year earlier to 5.05 million won in the third quarter of last year, marking the first decline since the statistics office began compiling relevant data in 2003.

Experts say it is important to make long-term efforts to create more decent jobs in more innovative and productive sectors and strengthen the social safety net for low-income groups.

By Kim Kyung-ho (khkim@heraldcorp.com)