Bolster the suppressed domestic consumption

The government must do its utmost to draw bipartisan support to economy-related bills and accelerate reforms on industrial structure and deregulation.

Koreans are getting poorer by the day with their discretionary income trimming over the past two years under the double whammy of high inflation and debt cost. According to Statistics Korea, the surplus left in household budget after paying for taxes, interests and personal necessities such as food, housing and clothing averaged at 1,009,000 won ($753) per month in the second quarter, off 1.7 percent from the year-ago period. The 1-million-won threshold was barely sustained.

The balance refers to the discretionary income, or the money left after paying fixed costs and essential expenses that can be used for nonessential spending such as savings, asset purchases, investments or debt repayment. The thinning figure suggests Korean individuals and families are struggling to get by and cannot afford to increase wealth or reduce debt.

The household finance health is also worrisome due to the lengthening hardship. Discretionary income has been decreasing for eight straight quarters since the third quarter of 2022, the longest streak since 2006. Household finance is worsening as the steep inflationary gains have eaten away at disposable income. Debt financing cost has been rising by double digits for six consecutive quarters since the third quarter of 2022, also straining household finance.

The waning purchasing power naturally affects consumer spending to result in the sluggish domestic demand and economy. The retail sales index that measures consumer spending on goods and services fell 2.3 percent on year in July, extending the record-long losing streak for 16 months. Economic indicators also point to dismal prospects. The coincident economic activity index representing the current state of the economy fell 0.6 points to 98.4 in July. A reading below 100 means the economy is underperforming.

The government nevertheless maintains a state of denial. The Ministry of Economy and Finance in its latest economic outlook briefing observed “signs of modest recovery in domestic demand.” President Yoon Suk Yeol in a press briefing late last month assured the economy was “certainly” picking up and would continue to do better. The positive outlook entirely hinges on the recovery in exports led by chip demand. But improvement on the external front does not spill over to the domestic front.

Livelihood is tougher than the data shows. Policy responses cannot come timely if authorities cherry-pick positive data to their liking. Since there is a limit in the fiscal maneuvering room as the government is steadfast on safeguarding fiscal integrity, it needs to come up with more hands-on microeconomic measures. It must promote corporate investment and hiring to help bolster household income that can increase spending. The government must do its utmost to draw bipartisan support to economy-related bills and accelerate reforms on industrial structure and deregulation.