[금통위poll]③ "Domestic Demand Slump Due to High Interest Rates, Real Estate, and High Inflation"

Survey of 20 Economic Experts
Causes of Domestic Demand Slump: High Interest Rates, High Inflation, and Real Estate Market Downturn
Interest Rate Cuts Needed to Stimulate Domestic Demand

Recent domestic demand sluggishness in South Korea has been attributed by economic experts to the combined effects of high interest rates, high inflation, and a downturn in the real estate market.

According to a survey conducted by Asia Economy from the 1st to the 5th of this month targeting 20 economic experts including domestic and international securities analysts, bank and economic research institute economists, about half identified high interest rates, high inflation, and the real estate market downturn as causes (multiple responses allowed) of the domestic demand slump. There were also calls for a base interest rate cut to resolve the sluggish domestic demand.

South Korea's base interest rate has been held steady at 3.50% annually after nine consecutive freezes from February last year through February this year. While high interest rates persist, the perceived inflation rate remains elevated. According to Statistics Korea, the consumer price index rose 3.1% year-on-year last month, marking the second consecutive month above 3%.

Experts pointed to high interest rates and inflation as causes of the domestic demand slump. Baek Yun-min, an analyst at Kyobo Securities, stated, “Households and companies are experiencing sluggish spending sentiment due to high perceived inflation and delinquency burdens,” adding, “Companies face prolonged manufacturing sector downturns, and households suffer from weakened real purchasing power, limiting economic activity momentum.”

The continued contraction in construction investment due to the real estate market downturn and project financing (PF) issues was also cited as a cause.

Kim Eung-tae, a research fellow at Hana Financial Management Research Institute, explained, “Although exports, centered on semiconductors, have recently rebounded, the trickle-down effect of exports has weakened, and prolonged high interest rates and inflation have extended the domestic demand slump,” adding, “With a high household debt ratio, private consumption recovery is difficult, while construction investment contraction continues due to the real estate market downturn and PF issues.”

Heo Ji-soo, a research fellow at Woori Financial Management Research Institute, evaluated, “Private consumption is sluggish due to decreased real income from high inflation and increased principal and interest repayment burdens under the high interest rate regime,” and “Construction investment recovery is also slow due to construction companies’ cost burdens and worsening housing market conditions.”

Some experts identified structural risks such as population aging and household debt burdens as causes.

Park Sang-hyun, a researcher at Hi Investment & Securities, pointed out, “Various structural risks including industry imbalance, household debt burden, and population aging are causes of the domestic demand slump.”

"Resolving Domestic Demand Slump Requires Interest Rate Cuts"

Seven experts diagnosed that an interest rate cut is necessary first to resolve the domestic demand slump. Ahn Jae-gyun, a researcher at Shinhan Investment Corp., said, “Considering the current difficulty in raising wages immediately, an appropriate interest rate cut would be effective in stimulating domestic demand.”

Oh Seok-tae, an economist at Soci?t? G?n?rale (SG) Securities, stated, “Stabilizing inflation is a prerequisite,” but added, “Ultimately, an interest rate cut is the most realistically likely improvement measure.”

There were also experts who said structural improvements such as inflation measures and employment recovery must be achieved.

Jo Yong-gu, a researcher at Shin Young Securities, diagnosed, “A base interest rate cut is not a fundamental improvement measure,” and emphasized, “Exchange rate and inflation stabilization are necessary.”

Yoon Yeo-sam, a researcher at Meritz Securities, said, “While alleviating costs through interest rate cuts, structural reforms must also be carried out simultaneously.”

Kim Ji-na, a researcher at Eugene Investment & Securities, evaluated, “Consumer sentiment has weakened due to the real estate market downturn, delayed industrial restructuring, and prolonged inflation,” and added, “Mid- to long-term structural reforms and policies to improve vulnerable groups are needed.”

Meanwhile, some opinions suggested that artificial improvements are unnecessary. Kim Sung-soo, a researcher at Hanwha Investment & Securities, said, “Artificial domestic demand improvements should be avoided as consumption using leverage must be cautioned against,” and predicted, “Domestic demand will naturally improve in line with interest rate cuts in the second half of the year.”

Park Seok-gil, head of JP Morgan, diagnosed, “The current domestic demand slump is the cost of stabilizing inflation.”