Korea’s domestic demand rapidly loses steam

[Photo by Yonhap]

The South Korean economy is showing a sharp slowdown with domestic demand rapidly losing steam. The prolonged burden of high interest rates and high inflation, which has lasted for more than 20 months, is having a widespread impact on the economy as well as affecting people’s livelihoods. As a result, national retail sales posted the largest decline in 15 years, fueled by an increase in recessionary consumption patterns, where people are buying only cheaper goods.

According to data released by Statistics Korea on Monday, the country’s national retail sales in the second quarter of 2024 decreased by 2.9 percent compared to the same period a year ago. This is the largest decline since a 4.5 percent drop in the first quarter of 2009 during the global financial crisis, and the ninth consecutive quarterly decline in recent history.

The ongoing high-interest-rate environment since January of 2023 is cited as the primary cause of sluggish consumption.

“Even though exports are recovering relatively quickly, domestic demand is lagging behind,” Korea Development Institute (KDI) research fellow Kim Mee-roo said, citing prolonged high interest rates as a reason.

As consumer spending decreases, recessionary consumption behavior has become more evident, with pork imports hitting their highest level in six years in the first half of 2024. The Korea Rural Economic Institute explained that the economic downturn has led to an increase in imports of (cheaper) U.S. pork.

The second quarter’s Restaurant Industry Business Index also fell sharply to 75.6, down from 83.26 during the same period a year ago. GS25, a convenience store chain, saw its sales of discounted fresh foods nearing their expiration date increase by more than 4.5 times during the period compared to a year ago.

The employment situation also worsened. The Ministry of Employment and Labor announced on Monday that the number of new applicants for jobless benefits was 112,000 in July 2024, a 7.7 percent increase compared to the same period a year ago.

“The number of applicants for jobless benefits increased in the construction, shipbuilding, and shipping industries,” a senior official in charge of the ministry’s future employment analysis office said.

The elderly, who are the first to be affected during employment contractions, are relying on early withdrawals of their national pensions to endure the income cliff, even if an early withdrawal means a reduction in the pension amount. According to the National Pension Service, early pension recipients accounted for 15 percent of all old-age pension recipients and are seeking quick cash because they cannot endure the income gap until the pension age of 63 in 2024.

“If it is a domestic demand issue, it should be resolved through fiscal measures, while interest rate policies should defend against inflation,” Myongji University professor of economics Woo Seok-jin noted. “It takes about a year for the effects of interest rate cuts to reach consumption, so fiscal policy needs to be strengthened to support it.”

Woo also suggested that “the government should proactively forgive loans that have become delinquent during the Covid-19 pandemic.”