The Bank of Korea Reports 0.7% Decline in Household Real Purchasing Power
It is forecasted that South Korea will face a greater burden of principal and interest repayments compared to major countries, and the negative impact on private consumption will be more significant due to the worsening housing market. Additionally, with limited prospects for further employment growth and wage increases, household income is expected to show a slow recovery going forward.
On the 8th, the Bank of Korea (BOK) stated in its BOK Issue Note report titled "Evaluation of Consumption Trends and Future Conditions through Cross-Country Comparison" that "Although South Korea's recovery speed accelerated mainly in service consumption after the lifting of COVID-19 restrictions last year, the recovery momentum is weakening as it remains below the pre-pandemic trend."
According to the report, in terms of consumption capacity, South Korea has seen a significant increase in labor supply compared to the United States since the pandemic, but labor demand has not increased proportionally. Therefore, the extent of income improvement through additional employment growth and wage increases is expected to be limited. Real household purchasing power is projected to shrink further, with growth rates of 3.5% in 2021 (year-on-year), 3.0% last year, and 0.7% this year.
Regarding wages, labor demand is relatively weaker than in the U.S., and considering the poor performance of major companies, wage growth is expected to be limited.
In particular, South Korea has a significantly higher household debt level compared to major countries and a large proportion of variable-rate loans, causing a sharp increase in the burden of principal and interest repayments due to rising interest rates. The housing market in South Korea is also more sluggish than in major countries, raising the possibility of a strong negative wealth effect and a significant contraction in durable goods consumption such as home appliances and furniture associated with relocation.
However, the Bank of Korea analyzed that, unlike major countries, South Korea continues to accumulate excess savings, which could be used as a source of consumption funds in the future, supporting consumption recovery.
Oh Tae-hee, head of the Trend Analysis Team at the BOK's Research Department, explained, "The high increase in South Korea's excess savings compared to major countries is due to the relatively late reopening of economic activities and a significant contraction in consumer sentiment caused by the global economic slowdown. Given South Korea's high external dependence, there is a strong correlation between the global economy and consumer sentiment, as well as a high co-movement with private consumption. Therefore, if consumer sentiment improves with economic recovery, the accumulated savings can be utilized as consumption funds."
Furthermore, with the lifting of China's border closures, the inflow of Chinese tourists is expected to accelerate, which could improve business income for self-employed individuals and positively impact private consumption.
Oh said, "The negative effects of increased principal and interest repayment burdens and housing market sluggishness on private consumption are expected to be relatively greater than in major countries. Although private consumption growth is likely to slow significantly compared to last year, considering the accumulated household savings, the possibility of a sharp contraction is low."
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