KDI "Low Interest Rates and Easing Policies Must Continue Until Consumption Recovers"

'COVID-19 Economic Crisis and Household Consumption' Report

Nam Chang-woo, Research Fellow at the KDI Economic Strategy Research Department (right), and Cho Deok-sang, Head of Forecasting at the KDI Economic Outlook Office, are briefing at the Ministry of Economy and Finance on the 11th. (Photo by KDI)

[Sejong=Asia Economy Reporter Son Sun-hee] Amid the sharp contraction in household consumption due to the COVID-19 pandemic last year, a recommendation has been made to continue accommodative macroeconomic policies for the time being.

Nam Chang-woo, Research Fellow at the Economic Strategy Research Department of the Korea Development Institute (KDI), and Cho Deok-sang, Chief Forecaster at the Economic Outlook Office, stated in their report "COVID-19 Economic Crisis and Household Consumption" on the 11th, "Household consumption is likely to remain sluggish until COVID-19 herd immunity becomes visible, so it is necessary to continue accommodative macroeconomic policies." They added, "Since low interest rates are cushioning the consumption contraction caused by the spread of COVID-19, it is necessary to support the economy, including household consumption, through accommodative monetary policy for the time being."

Furthermore, they said, "Fiscal support should be considered within a reasonable range and level to prevent the reduction in household market income caused by social distancing from leading to additional consumption contraction," and "Considering that the consumption shock due to the spread of COVID-19 was significant in the middle-income class, it is necessary to select government support targets by considering both the income levels of economic agents and the 'scale of income shock'." They also added, "Since effective quarantine is a key factor in the recovery of household consumption, support should be provided concurrently to groups bearing significant social costs due to quarantine measures to secure the acceptability and sustainability of quarantine policies."

The report analyzed consumption behavior by household income level during the COVID-19 outbreak last year. As a result, consumption expenditure decreased in all households except for the lowest income quintile. The increase in consumption by the lowest income quintile households was analyzed to be due to increased disposable income as government support, such as emergency disaster relief funds, was concentrated on low-income groups.

Consequently, the group whose consumption expenditure decreased the most in real terms was the middle-income group, the third income quintile households. Compared to 2019, consumption expenditure in 2020 decreased by 6.8% for the third quintile, showing the largest decline. This was followed by the second quintile at -3.3%, the fifth quintile at -2.8%, and the fourth quintile at -0.8%.

The report explained, "The middle-income class was most exposed to the real shocks and uncertainties caused by COVID-19," suggesting "they likely increased precautionary savings and reduced consumption expenditure." In other words, although government support funds were mainly concentrated on low-income groups, the actual decrease in spending due to 'income shock' was greater among the middle class.

Additionally, unlike past economic crisis phases where both face-to-face and non-face-to-face consumption generally declined, during the COVID-19 pandemic last year, face-to-face consumption decreased while non-face-to-face consumption actually increased. In particular, non-face-to-face consumption such as automobiles increased significantly, especially among high-income households with relatively greater consumption capacity.

The report explained, "In the case of the median income group, which had the lowest growth rate in disposable income, they were most exposed to the COVID-19 shock, leading them to reduce durable goods consumption and increase precautionary savings."