Consumer Sentiment Drops While Prices and Housing Costs Rise... Uncertain Second Half Amid 4th Wave

First Economic Indicator Reflecting the 4th Wave

July CCSI Falls for the First Time This Year

Housing Price Outlook CSI Up for 3 Consecutive Months

Variable for This Year’s 4% Economic Growth Rate

[Asia Economy Reporters Eunbyeol Kim, Sehee Jang] As consumer sentiment weakened for the first time this year amid the 4th wave of COVID-19, uncertainty over the economy in the second half of the year is also growing. In the first half, consumption as well as exports showed signs of recovery thanks to the ‘revenge consumption’ effect, but if the 4th wave does not subside, the recovering domestic economy could collapse again.

The ‘July 2021 Consumer Sentiment Survey’ results released by the Bank of Korea on the 28th have attracted attention because if consumption is hit, growth in the second half cannot be guaranteed. When the Bank of Korea announced the second quarter economic growth rate the day before, it said achieving a 4% growth rate this year seemed feasible but could change depending on the COVID-19 pandemic. In particular, various economic indicators such as industrial activity, exports and imports, and employment trends will be announced one after another starting with the consumer sentiment index, and the possibility of simultaneous sluggishness cannot be ruled out. Meanwhile, housing prices and inflation continue to rise, and interest rates are expected to increase, making life even tougher for ordinary people.

If the COVID-19 Pandemic Continues, Shocks to Face-to-Face Services Will Increase

According to the Bank of Korea, the Consumer Confidence Index (CCSI) turned to a decline this month for the first time this year. Jung Kyu-chul, head of the Economic Outlook Office at the Korea Development Institute (KDI), said, "If COVID-19 prolongs and high-level social distancing continues, the economy centered on private consumption could face difficulties," adding, "If COVID-19 is ultimately not controlled, shocks will concentrate on face-to-face service industries, self-employed people, and small business owners."

It is fortunate that the consumption shock is less severe compared to the 1st to 3rd waves. The decline in CCSI this month (-7.1 points) was smaller than during the 1st wave from February to April last year (-31.5 points), the 2nd wave in September (-8.3 points), and the 3rd wave in December (-7.8 points). Hwang Hee-jin, head of the Statistical Survey Team at the Bank of Korea’s Economic Statistics Bureau, explained, "Although the number of confirmed cases is higher, the easing of social distancing measures and vaccination are factors behind this." The change in consumption patterns during the COVID-19 era, such as online shopping and delivery, also helped reduce the degree of consumption contraction.

Rapid Rise in Housing Prices and Inflation Could Become Economic Triggers

Meanwhile, housing prices and inflation continue to rise. The IMF cited rising housing prices and inflation as risks to the global economy in its July World Economic Outlook. According to the Wall Street Journal (WSJ), the S&P CoreLogic Case-Shiller Home Price Index surged 16.6% year-on-year as of May, marking the largest increase in 34 years since statistics began in 1987. In Korea, housing prices in the Seoul metropolitan area continue to soar.

According to the Monthly KB Housing Market Trends data released by KB Live Real Estate on the 25th, Seoul’s housing sales prices rose 1.00% in July, and the median price of apartments nationwide exceeded 500 million won. The Bank of Korea’s Housing Price Outlook CSI also rose 2 points this month to 129, marking an increase for three consecutive months. This means that more people expect housing prices to be higher one year from now. Both inflation perception and expected inflation rate rose to 2.3%.

Professor Lee In-ho of Seoul National University’s Department of Economics said, "Inflation caused by U.S. housing prices will primarily affect the price increase of imported intermediate goods in Korea," adding, "Overall production costs will rise." He also pointed out, "If prices rise, consumption may decrease, and the worst-case scenario of stagflation?where inflation occurs without economic recovery?could happen."

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