Realized Consumption Slump... Government Considers Reducing Individual Consumption Tax

First Saturday After Confirmed Case

Card Spending Drops to Less Than Half

Concerns Over GDP Decline if Consumption Slows Further

[Image source=Yonhap News]

[Asia Economy Reporters Kim Min-young, Lim Hye-sun, Jang Se-hee, Ki Ha-young, Moon Hye-won] The novel coronavirus infection (Wuhan pneumonia) has cast a chill over overall consumption, raising concerns about a domestic economic downturn. The worsening business conditions for self-employed individuals due to the consumption slump are also linked to a manufacturing recession that supplies goods, which is expected to negatively impact the Gross Domestic Product (GDP). The government is considering lowering the individual consumption tax on certain items to stimulate consumption.

According to the 'Credit and Check Card Merchant Approval Performance (Weekend Basis)' submitted by the Credit Finance Association to the National Assembly on the 11th, card usage on the weekend of January 25-26, which included the Lunar New Year holiday, was 2.0867 trillion won, a sharp 44.6% drop compared to 3.7667 trillion won on the previous weekend (January 18-19). In particular, on January 25, the first Saturday after the first confirmed domestic case of the novel coronavirus, card usage was 838.8 billion won, nearly half of the 2.1028 trillion won recorded a week earlier. Even considering that some stores, including department stores, were closed on Lunar New Year's Day, the halving of consumption within a week is unprecedented.

◆Retail Giants and Small Business Owners Cry Out= The retail industry is taking a direct hit to sales. Lotte Department Store's sales from February 1 to 6, the first weekend after the second and third domestic infections, fell by 20.5% compared to the same period last year. Especially at the Seoul Sogong-dong flagship store, which mainly attracts Chinese tourists, sales plummeted by 31.6%. During the same period, Shinsegae Department Store and Hyundai Department Store sales decreased by 12.5% and 8.9%, respectively. Lotte Duty Free and Shilla Duty Free saw sales drop by 30%. Shinsegae Duty Free's Myeongdong branch sales fell by as much as 40%. The estimated sales loss at Lotte Department Store's flagship store, which was closed for three days starting February 7, is expected to exceed 20 billion won.

With customers staying away, self-employed business owners face survival concerns. According to a survey conducted by the Korea Federation of Micro Enterprise on 1,096 small business owners from February 4 to 10, 97.9% (1,069 respondents) reported a decrease in business sales after the novel coronavirus outbreak. When asked about the rate of sales decline, 44% (480 respondents) reported a decrease of more than 50%, the highest proportion, followed by 27.2% (296 respondents) reporting a 30-50% decrease. Regarding changes in customer visits during the same period, 66% (721 respondents) said visits "decreased significantly," and 31.5% (344 respondents) said visits "decreased," totaling 97.5% who reported a significant or moderate decline. The main reason for the drop in visitors was "indefinite postponement or cancellation of various meetings, events, and travel," cited by 61.4% (667 respondents).

If the consumption slowdown continues, concerns about a GDP decline due to a domestic economic recession will also grow. Professor Oh Jung-geun of Konkuk University's Department of Economics said, "Consumption accounts for about 50% of our country's GDP. If consumption decreases by 5%, GDP will immediately decrease by about 0.25%." He also pointed out, "During the 2015 Middle East Respiratory Syndrome (MERS) outbreak in Korea, 98,000 self-employed people were lost."

In fact, during the MERS outbreak in 2015, consumption sharply declined as people refrained from going out due to infection concerns. According to data released by the Credit Finance Research Institute at the time, card approval amounts in the first half of May (1-15) before MERS cases were confirmed increased by 8.1% compared to the same period last year, but in the second half (16-31), when the MERS outbreak spread, the increase was limited to 3.2%. In June 2015, card approvals at general hospitals decreased by 13.8% year-on-year, and leisure industries such as amusement parks and water parks plummeted by 43.6%. Card approvals in transportation and large discount stores decreased by 0.6% and 6.2%, respectively, compared to the previous year.

◆Government Considering Individual Consumption Tax Reduction= The government is reportedly considering lowering the individual consumption tax to minimize the impact on the domestic economy. A Ministry of Strategy and Finance official said, "After announcing measures by industry, we are internally discussing how to handle the domestic consumption part," adding, "A 30% reduction in the individual consumption tax on automobiles and measures to lower product prices may be pursued." In fact, the government reduced the individual consumption tax by 30% from August 2015 to June 2016, when the MERS outbreak intensified.

In the past, the government has pulled out the individual consumption tax reduction card whenever signs of a domestic economic downturn appeared. Professor Jung Se-eun of Chungnam University's Department of Economics said, "Most people who intended to buy cars already did so when the individual consumption tax was reduced, so it is uncertain how much the tax cut policy itself will stimulate consumption," adding, "Lowering consumption tax reduces government revenue, which could cause difficulties in government fiscal management."

This content was produced with the assistance of AI translation services.