Bank of Korea: "Household Savings Rate Rose from 6% to 10% Due to COVID-19... Must Prevent Entrenchment"

[Asia Economy Reporter Eunbyeol Kim] Due to the COVID-19 crisis, consumption has contracted, and household savings rates are expected to rise sharply. Typically, when savings rates increase, investment rises and productivity improves, but in the COVID-19 situation, the high uncertainty leads to reduced spending, which is more likely to result in economic stagnation.

On the 29th, the Bank of Korea explained in the 'Monthly Statistical Bulletin - Possibility of Level-up in Household Savings Rate Due to the COVID-19 Crisis' that "This year, the household savings rate is expected to reach around 10% for the first time since 1999, as consumption decreases significantly," adding, "Last year, the household savings rate was about 6.0%, so this is an increase of 4 percentage points." Considering the recent average household savings rate (2015?2019) was around 6.9%, it is clear that household savings rates have increased significantly due to reduced consumption after COVID-19.

Lee Yong-dae, head of the Survey General Team at the Bank of Korea's Research Department, stated, "The rise in household savings rates this year is largely due to strengthened social distancing and concerns about infection, which have contracted consumption in face-to-face service sectors such as travel, accommodation, and food services," adding, "Therefore, once the spread of infectious diseases subsides, suppressed consumption is expected to revive, and the increase in household savings rates will partially reverse."

However, he pointed out, "If the economic downturn prolongs, households' expected future income may decrease, and borrowing from financial institutions may become more difficult, leading households to increase their savings propensity as a precaution," adding, "As income inequality worsens, the elevated household savings rate may become entrenched."

If employment and income stagnation continue long-term and the COVID-19 situation persists, government support will inevitably decrease, reducing households' expected future income and increasing precautionary savings. If the economic downturn prolongs and borrowing from financial institutions becomes difficult, households tend to reduce current consumption. If low-income groups experience a larger income decline, the share of high-income groups with higher savings propensity in total household income may expand, potentially raising the overall household savings rate.

Lee said, "If the elevated household savings rate becomes entrenched, prolonged consumption stagnation may increase our economy's dependence on exports and investment, and support to households may more likely lead to savings rather than consumption, weakening the effect of domestic demand stimulus policies."

Given that exports and investment are more volatile than consumption, an increase in our economy's dependence on exports and investment could act as a factor that amplifies economic fluctuations.

He also emphasized, "In a longer-term perspective, with savings (capital supply) exceeding funds demanded for investment and demand declining, secular stagnation characterized by low growth, low inflation, and low interest rates may become the new normal." Therefore, he pointed out, "To prevent the household savings rate from becoming entrenched, policy efforts are needed to alleviate structural factors such as worsening household income conditions, increased credit constraints, and worsening income inequality."

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