"When Household Debt-to-GDP Ratio Exceeds 80%, Recession Risk Rises... South Korea Must Reduce Household Debt"

South Korea Household Credit Ratio Already at 105.1%, 'Excessive'

An analysis has revealed that when the household credit ratio relative to Gross Domestic Product (GDP) exceeds 80%, the likelihood of economic growth slowing down and a recession occurring increases not only in the medium to long term but also in the short term. In particular, in countries like South Korea where the household credit ratio relative to GDP has already surpassed 100%, there is a warning that the negative spillover effects of household debt on the macroeconomy could be even greater.

On the 28th, the Bank of Korea stated in its report titled "Analysis of Household Credit Accumulation Risk and Policy Implications" that the accumulation of household debt acts as a downward factor on growth over the medium to long term and increases the possibility of a recession.

To analyze the short- and long-term effects of household debt accumulation on GDP growth rate and recession occurrence, the Bank of Korea analyzed panel data from a total of 39 countries between 1960 and 2020. The results showed that a 1 percentage point increase in the household credit ratio relative to GDP (3-year accumulation) led to a 0.25 to 0.28 percentage point decrease in the GDP growth rate (3-year accumulation) after a lag of 4 to 5 years.

Additionally, household credit accumulation was found to increase the likelihood of recession occurrence in the medium term, with increases in household credit (3-year accumulation) raising the probability of recession after a lag of 3 to 5 years.

In particular, when the household credit ratio relative to GDP exceeds 80%, it was found to be closely related to recessions. The higher the household credit ratio exceeds 80% and continues to rise, the greater the likelihood of recession occurrence. In such cases, the probability of growth rate decline and recession occurrence increases not only in the medium to long term but also in the short term.

South Korea's household credit ratio relative to GDP reached 105.1% as of the fourth quarter of last year.

Kwon Do-geun, deputy head of the Monetary and Credit Research Team at the Bank of Korea, emphasized, "In situations like South Korea where the household credit ratio has already exceeded 100%, the negative spillover effects of household debt on the macroeconomy can be greater," adding, "Household debt should be reduced so that the household credit ratio approaches 80%."

Deputy Head Kwon added, "However, rapid deleveraging of household debt can act as a factor of financial instability, so deleveraging needs to proceed at a gradual pace."