Published : Aug. 24, 2016 - 16:48
Data released last week showed South Korea’s households are spending less and saving more, reflecting a growing anxiety over future uncertainties which is amplified by a protracted economic downturn.
According to a report by Statistics Korea, the average household consumption propensity, which refers to the ratio of consumption spending to disposable income, stood at 70.9 percent in the second quarter of this year, down 0.7 percent from the same period of last year. This figure marked the lowest reading since the government began compiling related data in 2003.
Monthly household disposable income edged up 1 percent on-year to 3.51 million won ($3,120) on average in the April-June period, but household consumption spending remained unchanged at 2.49 million won.
With consumption expenditure remaining flaccid, the country’s household savings rate has been on a continuous rise in recent years.
The rate, which is defined as the share of disposable income that is saved, rose from 3.86 percent in 2011 to 3.90 percent in 2012, 5.60 percent in 2013, 7.18 percent in 2014 and 8.82 percent last year, according to data from the Organization for Economic Cooperation and Development.
Korea’s household savings rate is estimated to stand at 8.66 percent this and next year, making it the fifth highest in the OECD.
The increase in household saving has not led to boosting investment, with companies affiliated with the country’s 10 largest conglomerates sitting on a record high of cash reserves at 550 trillion won as of end-June.
Strengthening household frugality is nothing but an encouraging trend for policymakers who have been trying to prop up the sluggish economy by boosting domestic demand as exports continue to decline.
With effective stimulus measures nearly exhausted, they worry that a delay in parliamentary approval of an 11-trillion won supplementary budget will further hamper efforts to bolster growth and create jobs.
Experts say the country’s changing demographic structure is set to precipitate the decrease in consumption spending.
The number of people in their 40s, who have the highest propensity to consume among all age groups, has continued to fall over the years since peaking at 8.53 million in 2011. The national statistics office forecasts the number will be down to 7.54 million by 2025.
With life expectancy rising in an era of low growth, household savings are set to continuously grow to prepare for prolonged post-retirement life.
Household consumption propensity has declined in Korea over the last 10 years at a faster pace than in Japan during its lost decade in the 1990s. Experts note it should be taken seriously that Korea’s consumption propensity remains below that of Japan when the proportion of people aged 65 and above in its population at 12.7 percent is less than half of the corresponding figure for Japan at 26.7 percent.
“More far-sighted policies beyond short-term stimulus measures should be carried out in a bolder manner,” said Lee Geun-tae, a researcher at the LG Economic Research Institute.
Many economists draw attention to recent data from the Bank of Korea that showed overseas card spending by Korean travelers expanded by 5.2 percent on-quarter to $3.47 billion in the April-June period. The amount also marked a 4.5 percent increase from the $3.32 billion recorded a year earlier.
The increase in spending by Korean tourists abroad highlights the need to accelerate deregulation to develop tourism and other service industries and create new demand for consumption at home, experts say.
They also call for a package of measures to strengthen support for low-income households that tend to show higher propensity to consume.
According to Statistics Korea, consumption spending as percentage of disposable income amounted to 107 percent for the bottom 20 percent income group in the second quarter of the year, compared to 59 percent for the top 20 percent.
But the average monthly income earned by the lowest 20 percent of households fell by 6 percent from a year earlier to 1.39 million won in the April-June period, while the comparable number for the top 20 percent climbed by 1.7 percent to 8.21 million won.
A 2015 analysis by the International Monetary Fund, which was based on data spanning from 1980 to 2012 in 159 countries, found a 1 percentage increase in the proportion of income for the top 20 percent group led to economic growth declining by an annual average of 0.08 percent over the next five years while the same change for the bottom 20 percent pushed up growth by 0.38 percent on average annually.
In this regard, experts say, tightening the social safety net for the poor can be seen as strengthening the foundation for bolstering consumption and growth.
By Kim Kyung-ho (khkim@heraldcorp.com)