Consumers, the last hope for growth in Korea, taking a breather

Consumer spending is on the decline as Koreans face a one-two punch of rising interest rates and rising prices. Restaurants and pubs, usually bustling with people at the end of the year, sit empty, while nail shops and hair salons are cutting...

A photo of a traditional market situated in Seoul. The Federation of Korean Industries (FKI) forecasts that household spending for next year is expected to decrease an average of 2.4 percent compared to last year, according to a survey published on Dec. 6. [YONHAP]

Consumer spending is on the decline as Koreans face a one-two punch of rising interest rates and rising prices.

Restaurants and pubs, usually bustling with people at the end of the year, sit empty, while nail shops and hair salons are cutting prices attempting to draw more customers.

At a pub situated in Jongno District, central Seoul on Dec. 22 at around 7 p.m., only five out of 10 tables were filled although it was three days before Christmas. In 2019, before Covid, reservations for a spot at the pub were booked months in advance at the end of the year.

“This time of year is supposed to be the busiest season out of the entire year, but now I’m at a loss wondering what to do,” the pub owner said. “I think the number of customers is going to continue to dwindle, so I’m seriously considering changing to another business.”

There were about 10 other pubs and restaurants open near the once-bustling pub, but only three to four places were more than half filled.

“I don’t think year-end revenue will substantially increase this year except for well-known areas such as near the Gangnam Station or Hongik University,” the owner said.

The economy has been fast cooling as exports and domestic demand take a hit. Even “revenge spending” — impulsive spending driven by the frustration of missing opportunities due to Covid-19 — is weakening and leading to disappointment for stores, restaurants and pubs hoping for a year-end boost.

The composite consumer sentiment index (CCSI) was 86.5 points in December, down 2.3 points compared to last month, according to data from Bank of Korea on Sunday. When the CCSI goes below 100, people tend to cut back on their spending.

The retail business survey index (RBSI) fell to 120.4, down 0.2 percent compared to last month, according to Statistics Korea. The numbers are down for two successive months, which means that the demand fell for customers shopping at department stores and marts.

“The fourth quarter was the lowest out of recent three quarters,” said a spokesperson from Ministry of Strategy and Finance.

Of 500 self-employed restaurant owners, 68.6 percent said that this year’s revenue decreased compared to last year, while 69.6 percent replied this year’s net profit decreased compared to last year, according to a survey by the Federation of Korean Industries (FKI). On average, this year’s revenue decreased by 12.5 percent and net profit decreased by 12.4 percent.

Through the third quarter, the domestic economy grew for nine consecutive quarters driven by consumer spending.

While GDP in the third quarter rose 0.3 percent compared to second quarter, net exports fell 1.8 percentage points. But domestic spending and facility investment helped the GDP grow.

Consumers are now closing their wallets as real incomes decline due to high interest rates and rising prices while their wages stay the same.

A nail salon located in Yongin, Gyeonggi, cut the price of nail gel to 35,000 won ($15.79) from 40,000 won, while hand care service, for which it charged 20,000 won, is now free of charge. The point accumulation rate rose from 10 to 20 percent of the price charged.

“When people’s incomes becomes meager, the first to go is beauty-related spending,” said the salon owner. “This year, at least I had Covid-19 relief funds, but I don’t know if I can hold on through next year.”

A poster plastered at a hair salon right next to the shop said it cut the price of the perm by half, but the salon looked vacant.

As spending decreases, products pile up are warehouses. Inventories skyrocketed to 180 trillion won for 30 listed companies at the end of the third quarter, the highest ever.

Distribution channels and companies related to consumer goods are tightening their belts as well. Lotte Himart, an electronics goods retailer, accepted voluntary retirements earlier this month, the second time since 2020. For the first time ever since its establishment, Lotte Duty Free accepted voluntary retirements, from Dec. 15, while other companies, such as Purmil, Hite Jinro and Oriental Brewery (OB), each accepted voluntary retirements in the third quarter.

FKI forecasts that household spending for next year will decrease an average of 2.4 percent compared to last year, based on a survey of 1,000 participants. The primary cause of the decline in consumer spending was inflation, according to 43.9 percent of the participants.

“The slump in spending may continue even until 2024 if there is no guaranteed signal that the sharp increase of interest rates and decrease in price of property assets and stocks will stop,” Professor Jung Yeon-sung of Department of Business Administration at Dankook University said.

BY CHOI HYUN-JU [lee.jaelim@joongang.co.kr]