Despite a recent rebound in consumer sentiment, the country’s household consumption is set to weaken in the longer term amid deteriorating employment conditions and rising debt-service costs, experts say.

Bank of Korea data showed last week consumer confidence rebounded in September after falling for eight straight months, partly on the back of robust exports and low inflationary pressure. The composite consumer sentiment index, which is based on the central bank’s survey of about 1,900 households throughout the country, stood at 101.7 for September, up 2.5 points from the previous month. A reading above 100 means optimists outnumber pessimists.

Separate government data released last week showed retail sales in Korea increased in August from a year earlier due mainly to a rise in sales at online stores that are attracting customers with fast delivery and easy transaction services. The combined sales of 26 major retailers amounted to 10.53 trillion won ($9.4 billion) in August, up 6.5 percent from a year earlier, according to figures from the Ministry of Trade, Industry and Energy.

But the upward trend in private consumption will not be maintained for long, analysts say, as many households are tightening their purse strings out of concerns over the unstable job market and the growing prospect of interest rate hikes.

Sluggish household consumption dragged down the country’s propensity to consume to a 13-year low in 2017, according to recent BOK data. The average consumption propensity, or the ratio of private and government spending to disposable income, stood at 78.9 percent last year, down 0.2 percentage point from the previous year and the lowest since the 78.1 percent recorded in 2004. It continued to fall after peaking at 81.6 percent in 2012.

The country’s overall consumption rose 4.7 percent on-year to 1,097.6 trillion won in 2017, while its disposable income grew 5 percent to 1,390.8 trillion won. Private spending increased 4.2 percent last year, with government expenditure expanding 6.5 percent.

Korea’s consumption propensity is expected to drop further this year as worsening employment conditions and rising debt-service costs are weighing on household consumption, which accounts for more than 90 percent of private spending.

In a meeting of economy-related ministers last week, Finance Minister Kim Dong-yeon, who doubles as deputy prime minister for economic affairs, conceded dismal job conditions in the country might continue for the coming months due to ongoing corporate restructuring and policy uncertainties.

According to Statistics Korea, the number of employed people increased by a meager 3,000 in August from a year earlier, the smallest since January 2010, when 10,000 jobs were lost in the aftermath of a global financial crisis. The unemployment rate rose by 0.4 percentage point on-year to 4 percent in August.

Particularly worrisome was that the number of employed people in their 30s and 40s, who tend to show a higher propensity to consume, shrank by 78,000 and 158,000, respectively.

A steep hike in the minimum wage has driven mostly low-paid workers out of their jobs and the implementation of a shorter workweek has reduced incomes earned by employees. According to data from the state statistics office, most working families as well as poor households saw their earnings decrease in the second quarter of this year, compared with a year earlier.

“(The reduced earnings) seem to have stemmed from too rigid a policy,” said Sung Tae-yoon, an economics professor of Yonsei University, referring to the income-led growth policy pursued by President Moon Jae-in’s administration, which is accompanied by a set of pro-labor measures.

Possible interest rate hikes in the coming months would result in further dampening consumption spending by households saddled with growing debts.

The BOK, which has kept its key rate at 1.5 percent since November, is expected to raise the rate by 0.25 percentage point as early as this month to narrow the rate gap with the US. Last month, the US Federal Reserve lifted its benchmark rate by a quarter point for the third time this year to a range of 2 percent to 2.25 percent, forecasting another rate hike in the remainder of the year.

Korea’s household debt reached a record high of 1,493.2 trillion won as of end-June, up 24.9 trillion won over the previous three months, according to BOK data. Nearly 70 percent of the borrowings by the country’s households carry floating rates, exposed to the risk of being immediately affected by rate increases.

Ju Won, an economist at the Hyundai Research Institute, a private think tank, said the government needs to take steps to boost employment in the private sector and cut taxes to help galvanize consumer spending.

Experts note strengthening the competitiveness of the local services sector is also urgently needed to funnel growing overseas spending by Korean travelers into domestic consumption. They say the government should carry out deregulation to promote high-value-added service industries, including tourism, leisure, health care and big data marketing.

Educational reform is also needed to help boost domestic consumption spending by reducing private education expenses, which accounted for nearly 20 percent of household expenditure in 2016, up from 10.6 percent in 2005, according to an HRI report.

By Kim Kyung-ho 
(khkim@heraldcorp.com)