A strong rebound in domestic consumption was cited as a major driving force behind the Korean economy’s growth at its steepest pace in five years during the latest quarter.
Norayngjin Fish Market (Yonhap)
The country’s gross domestic product grew by 1.2 percent from the previous quarter in the July-September period, the highest rate since it peaked at 1.7 percent in the second quarter of 2010, according to data released by the Bank of Korea last week.
Sluggish local spending, coupled with slumping exports, had held down quarterly growth below 1 percent for the previous five consecutive quarters.
The rapid rebound, which surpassed the BOK’s earlier estimate of 1.1 percent, was partly seen as resulting from a base effect, given the growth rate remained at a near-flat 0.3 percent in the second quarter when domestic consumption was hit hard by the Middle East respiratory syndrome outbreak.
As analysts at the central bank noted, the extra budget worth 11 trillion won ($9.7 billion) was also instrumental in boosting domestic demand. Consumer spending rose by 1.1 percent from three months earlier in the third quarter, a sharp turnaround from a 0.2 percent drop in the second quarter.
With exports continuing to contract amid weak global demand for some key Korean products, the government is trying to shore up this year’s growth target at 3.1 percent by boosting domestic consumption. The BOK data showed domestic consumption added 1.9 percentage points to the third quarter growth, while exports pulled it down by 0.7 percentage points.
Officials at the Ministry of Strategy and Finance expect that a government-led nationwide sales event, which ended its two-week run Oct. 14, would result in boosting GDP growth in the fourth quarter by 0.1 percentage point. Touring a department store in Seoul on the last day of the event named Korea Black Friday, Finance Minister Choi Kyung-hwan said efforts would be stepped up to see that both customers and businesses would benefit more from the event to be held annually on a regular basis.
But the government seems to have no other effective tools to bolster domestic consumption.
Many economists have a critical view of the sales promotion earlier this month, which they say only led consumers to spend their money in advance, warning the economy may be hit by a drastic cut in consumer spending next year. They note the government should not bind itself to short-term measures to promote consumer spending, but ought to look for ways to expand it over the long term.
“Certainly, some immediate measures were needed in recent months to reinvigorate the dampened consumer sentiment,” said Lee Jun-hyup, an analyst at the Hyundai Research Institute. “But they should now be accompanied by efforts to solve structural problems.”
Consumer spending in Korea can hardly be expected to continuously increase as local households are piling up debt and their disposable income is rising at a slow pace.
Bank loans extended to households are forecast to increase by 73 trillion won this year, nearly double the annual growth of 37.3 trillion won last year.
Over the past decade, the average monthly income of households with two or more persons increased by less than 2 percent annually in real terms. What is particularly worrying is the widening income inequality. The gap between average monthly incomes of the top 10 percent and bottom 10 percent of households widened from 5.59 million won in 2004 to 8.63 million won in 2014. Rising rent and concern over future uncertainties have made low- and middle-income families tighten their wallets.
The urgent task of liquidating marginal companies, which will be entailed by job losses, may also result in further dampening domestic consumption. According to recent data from Chaebul.com, an online corporate tracker, the number of companies whose operating profits fell short of paying interest on their debts for three consecutive years rose by 22 percent from 2,698 in 2009 to 3,295 in 2014.
Some analysts, however, indicate that overhauling unprofitable businesses in a thorough and swift manner would serve to boost domestic consumption in the long run.
“The restructuring of marginal companies could be the best way to sustain domestic spending by eliminating economic inefficiency,” said Kim Seong-tae, a senior researcher at the Korea Development Institute, a state-run think tank.
This restructuring work needs to be accompanied by measures to increase unemployment benefits and extend the period of their payment, many economists note, stressing the fundamental way to bolster domestic expenditure is to create more jobs particularly in service sectors through drastic deregulation.
By Kim Kyung-ho (khkim@heraldcorp.com)
