Before the COVID Resurgence in July... All Consumption Decreased Except Convenience Stores

Statistics Korea 'July Industrial Activity Trends'
Consumption Already Plunged 6.0% Even Before COVID-19 Resurgence

[Image source=Yonhap News]

[Asia Economy reporters Kim Hyunjung and Kim Eunbyul] As the disaster relief funds provided by the government ran out, consumers immediately cut back on their spending. With the exhaustion of the disaster relief funds, the policy effect effectively ended within two months, making it difficult to expect a virtuous cycle effect in the economy through government-led stimulus. Considering the recent resurgence of COVID-19 from mid-month, related indicators for this month are expected to worsen further.

According to the 'July Industrial Activity Trends' released by Statistics Korea on the 31st, retail sales last month plummeted by 6.0% compared to the previous month. Although it increased by 0.5% compared to the same period last year, maintaining the usual level, this was the largest decline in five months since February (-6.0%), due to nearly all (90%) of the disaster relief funds distributed in May being used up and the reduction in the individual consumption tax cut on automobiles. The sales decline was observed across almost all business types, including specialty stores (-9.5%), duty-free shops (-37.6%), department stores (-5.0%), supermarkets and general stores (-2.4%), and large discount stores (-1.0%). Only non-store retailers (20.9%), passenger car and fuel retailers (9.4%), and convenience stores (2.3%) showed an increase.

However, Statistics Korea emphasized when releasing this data that "it is difficult to say the effect of the disaster relief funds has completely ended." They noted that the overall macroeconomic multiplier effect should also be considered. The multiplier effect assumes that government spending leads to an increase in national income, which in turn causes a chain reaction of increased consumer spending, and it is calculated by determining how much total income increase results from the government’s expenditure.

[Image source=Yonhap News]

The trend of reduced consumption in July supports the Bank of Korea’s analysis that disaster relief funds have a minimal effect on boosting economic growth. According to the 'BOK Macroeconometric Model (BOK20) results,' the fiscal multiplier for government transfer payments was estimated at 0.2 in the first year. Transfer payments are income given without compensation unrelated to production activities; disaster relief funds, which the government provides and the private sector decides whether to consume, are classified as transfer payments. This means that if 1 trillion KRW is distributed as disaster relief funds, the real gross domestic product (GDP) increases by only 200 billion KRW in that year. The average GDP increase over three years was analyzed to be 330 billion KRW.

Concerns that the ripple effect of disaster relief funds would be limited had been raised in academic circles even before the payments were made. This is because receiving disaster relief funds often replaces existing consumption rather than creating new consumption that would not have otherwise occurred.

The Bank of Korea analyzed that economic effects are greater when government consumption and government investment increase rather than transfer payments. The GDP increase effect in the first year was 850 billion KRW and 640 billion KRW, respectively, when government consumption and government investment were each increased by 1 trillion KRW.

The Consumer Confidence Index (CCSI) is also likely to decline again from next month. The CCSI for August, announced by the Bank of Korea, was 88.2, up 4 points from July but still much lower than January’s 104.2 before the COVID-19 outbreak. It is far below the baseline of 100. Notably, this survey was conducted before the implementation of social distancing level 2, and since then, social distancing in the Seoul metropolitan area has been raised to level 2.5, so the related impact is expected to be reflected in September.

Statistics Korea also forecasted that the impact of flood damage and the rapid increase in COVID-19 cases starting in August would be additionally reflected in the indicators. A Bank of Korea official said, "With the second wave of COVID-19 spreading and inflation continuing due to the rainy season and heatwave, it remains to be seen whether the CCSI will continue to rise." This indicates that the resurgence of COVID-19 could dampen the recovery trend in consumer sentiment.

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