Koreans spending less and saving more amid rising interest rates, taxes, inflation

[Photo by Lee Chung-woo]

South Koreans are spending less despite return to normalcy after two years of virus battle due to rising interest rates, inflation, and tax burden to bode badly for recovery in domestic demand.

According to Statistics Korea data on Thursday, the average propensity to consume (APC), which measures how much disposable income goes to consumption, fell to 65 percent versus disposable income in the first quarter, down from 68.9 percent in the same period a year ago and 67.4 percent in the third quarter ended September last year.

The fall comes despite an increase in average monthly income per household from 3.202 million won ($2,533) in the first quarter last year to 3.5 million won this year to suggest households are putting off spending in fear of high inflation and interest rates.

Average monthly surplus, which is disposable income minus spending, rose to an all-time high in the first quarter as families spent less and increased savings. The average surplus per household reached 1.3 million won in the January-March period, up 21.7 percent on year, and the highest since the agency began compiling related data in 2006. It is also the second-steepest growth for the first quarter after 35.5 percent surge in the first quarter of last year after the outbreak of Covid-19.

The saving comes amid galloping inflation and consequential faster interest rate rises.

Annual consumer price growth rose 2.5 percent last year from 0.4 percent in 2019 and 0.5 percent in 2020. The gains are expected to hit 4.2 percent this year, according to estimate by state think tank Korea Development Institute (KDI).

Record-sized second supplementary budget is projected to add 0.16 percentage point to inflation gain this year.

Taxes are also another burden.

The monthly average non-living expenditure per household that includes taxes and insurance fees reached 965,000 won in the first quarter, up 10.5 percent from a year ago.

Of the increase in non-living expenditure, tax including earned income tax and property tax surged by the biggest 28.3 percent, followed by social insurance payments 10.3 percent, and transfer payments between households 8.9 percent.

The data weighs grimly over domestic demand.

According to KDI, private spending grew 3.6 percent last year, rebounding from a 5 percent on-year decline in 2020. The think tank forecast private spending to gain 3.7 percent this year and 3.9 percent next year to back 2.8 percent and 2.3 percent estimated gains in gross domestic product for this year and the next, respectively.

But reduced spending could further slow economy.

[¨Ï Maeil Business Newspaper & mk.co.kr, All rights reserved]