The Bank of Korea: "US Consumer Goods Export Growth to Gradually Slow... EU Export Outlook Improving"

BOK Issue Note: How to View Consumption Trends in the US and Euro Area
US: Continued Consumption Slowdown Centered on Goods and Low-Income Groups
EU: Recovery from Consumption Slump and Shift to Real Household Income Growth

There is an analysis that the growth trend of South Korea's consumer goods exports to the United States will gradually slow down following the weakening consumption trend in the U.S. Meanwhile, exports to the Euro area, which had been sluggish, are expected to gradually improve.

According to the Bank of Korea's 'BOK Issue Note, How Should We View Consumption Trends in the U.S. and Euro Area?' published on the 16th, the U.S. economy has seen a weakening consumption trend this year, raising concerns about future growth. In contrast, the Euro area's economy is expected to improve moderately as personal consumption recovers during the year.

U.S. Consumption Weakening Continues... This Year's Consumption Growth Lower Than Last Year

According to the report, U.S. consumption has weakened this year, especially in goods and among low-income groups. U.S. personal consumption, which was robust last year with over 3% growth for two consecutive quarters in the second half, slowed significantly to 1.2% growth in April-May this year. Service consumption remained favorable due to increased medical demand after the pandemic and large-scale retirements of baby boomers. However, goods consumption turned negative, mainly due to weak durable goods consumption such as automobiles and IT devices, which are sensitive to interest rates and high prices. In particular, the growth of essential goods slowed, indicating poor consumption among low-income groups.

This is evaluated as a combined effect of ▲accumulated impact of high inflation and high interest rates ▲depletion of excess savings ▲deterioration of the financial situation of vulnerable households ▲weakening consumer sentiment. Especially, excess savings, which represent households' consumption capacity and have driven U.S. consumption so far, are estimated to have been depleted around March this year, contributing to the consumption weakening.

Going forward, U.S. consumption is expected to continue its current weakening trend and gradually converge to the long-term trend level after next year. The weakening trend in durable goods consumption is expected to continue, and wage growth is also expected to slow. However, the possibility of a sharp deterioration in labor income due to unemployment rates falling below past averages is low, and considering the strong consumption capacity of high-income groups and the Federal Reserve's conditions for easing interest rates, consumption is not expected to shrink significantly in the short term.

Hyun-A Lee, head of the U.S. and European Economy Team at the Bank of Korea's Research Department, who authored the report, said, "Excess savings, which had been the driving force of U.S. consumption, have been depleted, leading to consumption weakening mainly among vulnerable households," adding, "The reason we expect a relatively gradual slowdown is that the top 20% account for 80% of total U.S. consumption."

She continued, "High-income groups, who account for most consumption, have recently benefited greatly from rising asset prices such as stocks and real estate," and explained, "Considering their favorable consumption conditions, we do not expect consumption to decline sharply."

EU Consumption Reaches a 'Turning Point'... Household Real Income Increases

Consumption in the Euro area, which had been sluggish for a long time after the pandemic, is analyzed to have recently reached a turning point. The Euro area experienced delayed wage increases due to union-centered wage negotiations, and a higher dependence on manufacturing than the U.S. led to prolonged manufacturing downturns, resulting in weak household consumption and slower real income improvement compared to the U.S. Moreover, the Euro area has been directly exposed to the effects of the Russia-Ukraine war due to its high dependence on imports of energy and food.

However, recently, household real income in the Euro area has turned to increase thanks to slowing inflation. This is expected to have a positive impact mainly on goods consumption going forward. Looking at the consumption growth pattern in the Euro area since the pandemic, service consumption generally increased regardless of real income improvement. However, goods consumption mainly increased during periods when real income rose.

Additionally, with the European Central Bank (ECB) beginning interest rate cuts in June and expected to continue gradual monetary easing, consumption conditions are expected to improve positively. Especially, improvements are expected to appear mainly in interest rate-sensitive durable goods consumption. If consumption sluggishness eases in the future, a virtuous cycle of production-income-consumption originating from manufacturing-centered countries may appear relatively strongly.

Min-Ji Go, head of the International Comprehensive Team at the Bank of Korea's Research Department, explained, "Euro area consumption has been significantly affected by the prolonged high interest rate environment," adding, "In contrast, despite high interest rates, the U.S. economy showed strength due to offsetting factors such as excess savings, fixed-rate mortgage loans, and a favorable labor market."

She added, "Mortgage loans account for 70% of total loans in the U.S., and among them, 95% are fixed-rate," explaining, "Despite the high interest rate environment, the U.S. was less affected by high interest rates due to the structural difference of having a higher proportion of fixed-rate loans compared to the Euro area."

Regarding the future impact on consumption in the U.S. and Euro area, Go said, "Considering the export competitiveness of Korean companies, the growth trend of consumer goods exports to the U.S. will remain favorable, but it is expected to gradually decline as the U.S. consumption continues its moderate weakening trend," and added, "In Europe, if consumption and manufacturing improve supported by real income expansion and easing financial conditions, exports to the previously sluggish Euro area are expected to improve with a time lag."