It's Chuseok, but Domestic Economy is Frozen... When Will Private Consumption Improve?

Empty commercial spaces are located throughout the commercial area near Ewha Womans University in Seodaemun-gu, Seoul. Photo by Kang Jin-hyung aymsdream@

As high inflation and high interest rates persist, there is an analysis that private consumption improvement is being constrained. However, it is expected that consumption will gradually improve along with future corporate earnings improvements.

According to the Bank of Korea's Monetary and Credit Policy Report on the 16th, private consumption, which is the core of domestic demand, has been delayed in recovery due to the burden of principal and interest repayments caused by high price levels and high interest rates, as well as delayed income improvement.

Looking at prices, the cumulative price increases since COVID-19 have acted as a factor delaying the recovery of private consumption. In particular, the cumulative increase rate of living costs (since 2021) has been higher than the overall consumer price index, further shrinking the purchasing power of vulnerable groups such as the elderly and low-income households. As of last month, the overall consumer price index and living costs rose by 14.2% and 16.9%, respectively, compared to the end of 2020.

In a situation where household debt has increased significantly, the burden of principal and interest repayments due to high interest rates is also a factor limiting the improvement of consumption capacity. The decrease in durable goods consumption since the fourth quarter of 2022 until recently is also identified as being caused by high interest rates.

At the beginning of the year, special bonuses centered on large corporations decreased, and sectors with many self-employed individuals showed lower growth rates than other sectors, possibly delaying the improvement of private consumption.

However, the report forecasted that in the second half of the year, real purchasing power of households will improve due to an expansion in nominal wage growth supported by improved corporate earnings and price stabilization, and the recovery speed of private consumption will gradually accelerate.

It also added that demographic factors such as aging and low birth rates, as well as poor business conditions for the self-employed, could somewhat slow the pace of consumption recovery in the process.