Korea’s private consumption down 0.1% in Q2 amid higher prices, interest rates

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Private consumption in South Korea fell slightly in the second quarter of this year, breaking the growth trend in the first quarter, as households tighten the purse strings amid high inflation and interest rates.

According to a report released by the Bank of Korea (BOK) on Monday, private consumption in the April-June period fell 0.1 percent from the previous quarter, failing to maintain the growth of 0.6 percent in the first quarter.

In the first quarter, robust private consumption drove gross domestic product (GDP) to expand despite weak exports but sluggish private consumption in the second quarter pulled down growth by 0.1 percentage point, the report showed.

The weak consumption is estimated to have continued in July.

Goods consumption rose in passenger vehicles and food and beverages in the second quarter but fell in clothing and footwear. Service consumption also declined in food and accommodation and land travel, while health and welfare increased slightly.

The BOK recently released a revised economic outlook, projecting private consumption to grow by 2 percent this year and 2.2 percent next year. The figures are down 0.3 percentage point and 0.2 percentage point, respectively, from a forecast three months ago.

The recent slump in consumption is largely attributed to the weather, along with weaker demand for pent-up consumption, according to the BOK.

“Since May, and especially in July, above-normal rainfall has weakened consumption, mainly in items related to external activities such as clothing, food and accommodation, leisure, and travel,” it said.

Excluding weather-affected items from April through July, consumption rose 0.2 percent, it said. Recovery was led by a rise in self-employed income on the back of resumption of Chinese group tours, improvement in real purchasing power, increased discretionary savings, and improved consumer sentiment.

However, despite the optimism, industry observers believe that the recovery in private consumption will remain weak for some time. With high interest rates persisting, inflation is expected to rebound from August, putting pressure on households’ financial situations.

According to Statistics Korea’s household trend survey, the average monthly income per household in the second quarter stood at 4.79 million won ($3,579), down 0.8 percent from the same period a year earlier. It heads south after eight consecutive quarters of growth since the third quarter of 2021. When considering disposable income, which excludes fixed costs such as taxes, insurance premiums, and interest payments from the average income, it dropped even further. Disposable income was 3.83 million won, down 2.8 percent from a year ago, marking the largest decline in 17 years.

“Both average and disposable income being negative implies that households have no money to spend and that they are not spending as much as they used to due to high perceived inflation,” said Joo Won, a senior economist at Hyundai Research Institute.

“Companies are also not performing well, so they have less incentive to raise wages,” said Lee Sang-ho, head of the economic research team at the Korea Economic Research Institute. “In the end, if the benchmark interest rate remains high without much wage growth, real income will fall, making it difficult for consumption to recover.”

Experts believe that private consumption will only begin to recover next year, when a shift in monetary policy is expected. “With the government’s fiscal policy unlikely to have much of an effect, it will be difficult to see a recovery until interest rates are cut,” said Joo at Hyundai Research Institute.