[Initial Insight] Sinking Livelihood Economy... Now Is the Golden Time

[Asia Economy Reporter Lim Cheol-young] "The money I can spend keeps shrinking." A taxi driver's remark on a winter night when the cold wave with a wind chill of minus 20 degrees was raging evoked a sense of 'death throes.'

A red light has turned on for disposable income that individuals can use at their discretion. Rising prices combined with the burden on grocery bills, along with a year-long upward trend in the base interest rate, have increased interest burdens. The volatile international energy prices have triggered a heating cost bomb, and transportation fares such as subway, taxi, and bus fares have also joined the full-fledged upward trend.

Cries from individuals who have begun to feel their lightened wallets due to the anticipated red light are heard everywhere. Content dealing with 'tips' to reduce heating costs is heating up online, and inquiries from individuals seeking ways to ease interest burdens are flooding financial institutions. Insurance companies are also showing signs of liquidity management movements in preparation for a situation that reacts sensitively to household finances.

As spending money decreases, consumption is likely to shrink further. Signs are appearing from the United States, which leads the base interest rate hike trend. Although the Producer Price Index (PPI) for December, the biggest consumption season, released by the U.S. Department of Labor, showed a smaller increase compared to November, the retail sales announced by the Department of Commerce fell more sharply (1.1%) than experts' forecast (0.9%). Since this is an indicator that does not reflect inflation, the actual sentiment is likely to have frozen even more.

The domestic atmosphere is also unusual. The recovery trend in the dining-out industry, which had been recovering after the COVID-19 situation eased, has collapsed after five quarters. The dining-out industry business index for the fourth quarter of last year was 82.54, down 7.30 points from the third quarter. This is the largest drop since the first quarter of 2020, when COVID-19 first occurred. Securities firms have also lowered target stock prices for major clothing companies sensitive to consumer sentiment one after another, citing 'deterioration of consumer sentiment due to rising prices and interest rate hikes' as the background for valuation adjustments.

Only after the heating cost bomb exploded did the government, centered on the Presidential Office, hurriedly come up with measures. However, the uncertainty is greater to turn around the frozen sentiment caused by lightened wallets. Despite high concerns about the adverse effects of increased interest burdens followed by soaring energy prices on the livelihood economy, there was virtually no fundamental response except for temporary fuel tax cuts, resulting in low trust. Conscious of public opinion, the Presidential Office announced plans to ease the burden on vulnerable groups, while busily shifting responsibility for price increase deferrals to the previous administration.

The crisis of low-income groups is expanding to the middle class, which is likely to cause considerable shocks to the overall national economy. The finances of the bottom 20% first quintile households, who spend 75% of their disposable income on essential living expenses such as food, housing, and transportation, have long been in deficit. If timely measures are not taken, the shock of the forecasted economic recession will be more painful and prolonged for ordinary people.

As Milton Friedman said, "There is no such thing as a free lunch," the global economy is paying dearly for years of quantitative easing and helicopter money. While paying the price, the government has the role of proactively exploring all means to minimize the shocks that will hit the livelihood economy. Hopefully, this will not turn into a lament of "better late than never" (mansijitan, 晩時之歎).