"Signs of Structural Downturn... Time to Reorganize Low-Growth Strategies" [Domestic Demand Shock] ③

KDI Lowers Growth Forecast to 0.8%
High Interest Rates and Debt Weigh on Consumption
Distribution and Food Industries Prepare for Prolonged Low Growth

There is a growing consensus that the recession that hit the domestic market in the first quarter of this year is not a short-term shock, but rather a sign of a structural downturn in domestic demand. In the distribution and food industries, there are calls for a reorganization of business strategies to adapt to this era of low growth. Analysts also point out that a combination of high interest rates, household debt, and external uncertainties is forcing companies to change their market response strategies.

According to a report published by the Korea Chamber of Commerce and Industry on the 16th, Korea's consumption growth rate dropped from 9.1% between 1988 and 1996 to 4.5% after the 1997 foreign exchange crisis, 3.1% after the 2003 credit card crisis, 2.4% after the 2008 financial crisis, and as low as 1.2% after the 2020 COVID-19 pandemic. As consumption slows, the share of domestic consumption in Korea's gross domestic product (GDP) is also decreasing. As of 2023, Korea's domestic consumption ranked 28th among the 38 OECD countries, and was the second lowest among the 12 countries with a GDP of over $1 trillion, following only the Netherlands.

Kim Hyunsoo, head of the Economic Policy Team at the Korea Chamber of Commerce and Industry, stated, "Since the late 1990s, Korea has entered a phase of stepwise consumption contraction," diagnosing that "multiple factors are at play, including a decline in consumption propensity among the elderly, weakening job creation, and an asset structure heavily concentrated in real estate."

In fact, the Korea Development Institute (KDI) recently lowered its forecast for Korea's GDP growth rate this year from 1.6% to 0.8%, citing a slump in the real estate market and sluggish consumption as the background for the downward revision. Jeong Gyucheol, head of KDI's Economic Outlook Office, explained, "Externally, high tariffs imposed by the United States are a factor, while domestically, the downturn in the real estate market and the burden of household debt are acting simultaneously."

Photo by Jo Yongjun

The recovery in private consumption is also sluggish. Kim Jiyeon, general manager of economic forecasting at KDI's Economic Outlook Office, said, "Consumer sentiment plunged sharply at the end of last year and has remained at a low level since," diagnosing that "the slowdown in private consumption growth is due to a decline in production in sectors closely related to service consumption, such as accommodation and food, and arts and sports."

Experts believe that the sluggish domestic demand is likely to persist in the second half of the year and beyond. Kang Sungjin, professor of economics at Korea University, said, "The increase in household debt after COVID-19 and the ongoing high interest rate environment are suppressing consumption," expressing concern that "if the tariff conflict between the United States and China continues for a long time, it could negatively affect not only exports but also consumer sentiment." He added, "Rather than high expectations, a defensive policy stance is needed."

There is also a clear sense of concern in the industrial sector about a prolonged domestic downturn. A senior official at a distribution company said, "There is a high possibility that the domestic downturn will continue for the next 10 years," adding, "Since the growth potential of the domestic market alone is limited, pioneering overseas markets has now become a core strategy."

However, some believe that consumer sentiment could recover after political events. Cho Sanghoon, a researcher at Shinhan Investment Corp., said, "Since 2000, consumer sentiment has rebounded by an average of 3 percentage points immediately after presidential elections," noting that "policy expectations may be partially reflected." However, he emphasized, "Structural constraints such as an aging population and household debt remain, so the extent of the rebound will inevitably be limited."