[Editorial] Household consumption

In another gloomy indicator of the deepening economic downturn, monthly household consumer spending decreased by 1 percent on average from a year earlier to 2.54 million won ($2,240) in the first quarter of this year, according to figures released by the national statistics office last week. It is the first time that household expenditure has contracted since the January-March period of 2009, when it shrank by 3.6 percent in the immediate aftermath of the global financial crisis.

What was further worrisome was that the reduction, which followed increases ranging from 4.3 percent to 9.5 percent in the first quarter of the last three years, came as monthly household income grew, though at a slower pace. The monthly income of households with two members or more was up 1.7 percent on-year to an average of 4.19 million won in the first quarter of 2013, according to data from Statistics Korea.

The contraction in household consumption was attributed in large part to a 6.9 percent fall in spending on child care and education, which was seen as resulting from expanded support from the government. In a reflection of worries over the prolonged economic slump, however, most households refrained from spending that money on other things. Factoring out the decrease in child care and education spending, household expenditure still slipped by 0.1 percent.

The reduction in household spending has been preceded by a continuous decline in corporate investment and a slowing pace of export growth, which have pushed the quarterly growth rate of gross domestic product below 1 percent for the past eight consecutive quarters. The economy could further lose traction in the second half of the year as most of the fiscal stimulus package is set to be implemented by June.

Government policymakers need to work out measures to boost household consumption, which holds the key to economic recovery. A rise in spending also leads to more employment. According to research by the Bank of Korea, an increase of 1 billion won in consumption expenditure adds 17.1 new jobs. Enhancing household spending is also necessary for increasing or just maintaining tax revenues.

The focus of policy needs to be put on encouraging wealthy people to open up their purses. Spending by households in the top 20 percent income bracket slipped most steeply ―by 2.8 percent ― to 3.96 million won in the first quarter.

Some critics say that the reduction in consumption spending should not be used as a pretext to blunt the drive to strengthen taxation on high-income earners. But current economic conditions need effective measures to encourage them to spend more.