The Korea Herald


Sluggish household spending drags down economy

By Korea Herald

Published : March 8, 2017 - 15:44

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A set of measures unveiled by the government last month to boost private consumption included the designation of a family day once a month to encourage workers to leave work earlier and have more time to go shopping and travel with family members.

Many dismissed the idea as unrealistic, saying ordinary people were compelled to tighten their belts as incomes stagnated and prices continued to rise.
(123RF) (123RF)

According to recent data from Statistics Korea, household consumption spending decreased 0.5 percent on-year to an average 2.55 million won ($2,220) per month last year, marking the first decline since the statistics agency began compiling relevant data in 2003. On the inflation-adjusted term, it dropped 1.5 percent.

Households reduced expenditures on groceries and nonalcoholic beverages by 1.3 percent, clothing and shoes by 2.4 percent and communications services by 2.5 percent.

Accordingly, the average household propensity to consume, or the ratio of consumption spending to disposable income, recorded a five-year low of 71.7 percent last year.

Real household income fell 0.4 percent from a year earlier in 2016, while the consumer prices index inched up 1 percent throughout the year.

Consumer prices gained 2 percent in January, accelerating from the previous month’s increase of 1.3 percent. It was the highest on-year monthly rise since October 2012.

Household debt is also weighing on consumption spending.

The country’s household credit, which is composed of household loans and credit card spending, reached a record high of 1,344.3 trillion won in the fourth quarter of last year, up 11.7 percent from 1,203.1 trillion won a year earlier, according to data released by the Bank of Korea last month.

The ratio of household debt to disposable income rose from 133.9 percent in 2013 to 151.1 percent in 2016.

The number of marginal households, whose debt-to-disposable income ratio exceeds 40 percent, came to 1.81 million last year, up 14.7 percent from 1.58 million in 2015, according to a recent report from the National Assembly speaker’s policy office.

The consumer sentiment index stood at 93.3 for January, the lowest since March 2009, before slightly increasing to 94.4 in February.

The country’s retail sales recorded an on-month decline for three consecutive months through January.

Policymakers have been striving to bolster domestic spending to prevent a drop in private consumption from offsetting a recent upturn in exports to drag the sluggish economy deeper into a low-growth rut. Domestic consumption accounts for about half of Korea’s gross domestic product, which is projected by the government to increase 2.6 percent this year.

“It is necessary to work out effective measures to help increase household income steadfastly,” said Ju Won, an economist at the Hyundai Research Institute, a private think tank.

While overall household earnings remain flat, income inequality in the country has widened.

In 2016, the poorest 20 percent of households saw their average monthly income shrink 5.6 percent from a year earlier to 1.45 million won, while earnings of the richest 20 percent rose 2.1 percent to 8.35 million won.

Experts say the government needs to expand financial support and strengthen the social safety net for lower-income households while encouraging high-income earners to spend more at home than abroad.

There is certainly lots of room to increase domestic consumption, given expenditures by Korean travelers abroad increased from $16.4 billion in 2012 to a record high of $23.1 billion last year.

Lee Doo-won, an economics professor at Yonsei University in Seoul, noted raising taxes on the rich would be inconsistent with efforts to boost domestic consumption.

Given the disposable income of the wealthiest 20 percent group is about five times as much as that of the poorest 20 percent, it is hard to reinvigorate the economy without an increase in spending by high-income earners, he said.

The increased tax burden has worsened household financial conditions amid a protracted economic slowdown.

According to data released by Statistics Korea this week, households paid more than 1.9 million won in tax on average last year, up 2.1 percent from the previous year. It was the highest amount since such records began in 2003.

The increased tax payment by households was combined with a rise in levies on corporate profits to boost the government’s tax revenue to 242.6 trillion won in 2016 from 217.9 trillion won in 2015.

Economists say policymakers should be more active in implementing expansionary fiscal policy, which needs to be coupled with structural reform and deregulation to increase employment as a fundamental way to boost consumption.

Government data showed the private sector created 242,000 jobs last year, the smallest number since 2009, as businesses remain reluctant to recruit employees due to rising uncertainties surrounding the economy.

By Kim Kyung-ho (