BOK: "Downward Pressure on Private Consumption... Overseas Consumption to Increase but Goods and Services Consumption to Slow"

Impact of Real Purchasing Power Decline, Asset Price Drop, and Interest Rate Rise

[Asia Economy Reporter Seo So-jeong] Since the second quarter of this year, private consumption has shown a rapid recovery centered on face-to-face services, and overseas consumption is expected to expand significantly. However, going forward, consumption of goods is expected to stagnate due to weakening real purchasing power, falling asset prices, and rising interest rates, while the recovery trend in service consumption is also expected to weaken and slow down.

On the 20th, the Bank of Korea stated in its report "Review of the Recovery Path of Goods, Services, and Overseas Consumption" (BOK Issue Note) that "As of the second quarter of this year, consumption of goods is estimated to be close to the trend level, while service consumption (98% of the trend) and overseas consumption (28%) are estimated to be below the trend level."

According to the Bank of Korea, the pace of employment recovery and wage increases is expected to gradually slow due to the upcoming global economic slowdown, and the decline in housing prices is also expected to restrict consumption recovery through a negative asset effect. However, part of the excess savings accumulated since the pandemic (about 10% of private consumption as of 2021) is expected to be used as a source of consumption funds, mitigating income shocks.

The impact of rising interest rates and weak consumer sentiment is expected to be most pronounced in goods consumption, especially durable goods. Production disruptions that had constrained passenger car consumption, which accounts for 44% of durable goods, are improving, and clothing (60% of semi-durable goods), which had been sluggish due to reduced outdoor activities after the pandemic, is increasing. These factors are analyzed as mitigating the sharp contraction in goods consumption in the future.

In the case of service consumption, it is rapidly recovering after the easing of quarantine measures, but the recovery speed is expected to slow as pent-up demand gradually dissipates. Overseas consumption is expected to see a full-scale pent-up effect of overseas travel due to the lifting of domestic and international entry and exit quarantine measures and reduced sensitivity to infectious diseases among economic agents.

In fact, the number of domestic travelers going abroad has been rapidly increasing recently, and recovery is expected to accelerate further due to the relaxation of entry restrictions by major travel destination countries and increased international flights by airlines. In particular, after Japan, the largest destination country for Koreans, announced the easing of entry restrictions, demand for travel to Japan has increased significantly. On the first day of the resumption of visa-free tourism to Japan on the 11th, about 5,000 people departed for Japan, more than double compared to the same day last week.

The Bank of Korea expects that downward pressure on the recovery path of private consumption will increase depending on the speed and extent of the global economic slowdown and interest rate hikes.

The Bank of Korea explained, "Considering the size of households' interest-bearing assets and liabilities and the interest rate spread between deposits and loans, when the base interest rate rises, the deficit in households' interest income and expenses expands, reducing private consumption capacity." It added, "Considering the distribution of debt service ratio (DSR) by household, when interest rates exceed a certain level, the debt burden of vulnerable households with excessive borrowing expands non-linearly, which can significantly shrink their consumption capacity."

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