[Domestic Demand Revives] ① Wallets Reopen... Increased Private Consumption

Recently, the Korean economy has seen a significant decline in the contribution of export growth, while private consumption has become the main driver of economic growth. Household consumption, the core of private consumption, is showing an upward trend, and especially the 'Consumer Sentiment Index,' which reflects future consumption, has been rising for three consecutive months, raising expectations that domestic demand recovery will be led.

According to government ministries and related agencies on the 28th, the Bank of Korea recently reported that real Gross Domestic Product (GDP) grew by 0.3% in the first quarter of this year compared to the previous quarter. Despite the deterioration of key economic indicators such as a trade deficit exceeding $22 billion and a 4.0% decrease in facility investment during the same period, private consumption (0.5%) increased, serving as a pillar for the Korean economy. The economic growth rate, which turned negative in the fourth quarter of last year (-0.4%), rebounded in just one quarter thanks to consumption.

Endemic Fully Underway... March Tourism Spending Up 22% Year-on-Year

The increase in private consumption is largely due to the easing of COVID-19 restrictions, including the lifting of the indoor mask mandate after three years, which led to an explosive increase in face-to-face activities. The recovery in consumption was particularly evident in tourism-related indicators such as travel and restaurant industries. According to the Korea Tourism Data Lab operated by the Korea Tourism Organization, the number of domestic local tourists last month was 833.44 million, an increase of 10.8% (81.64 million) compared to the same period last year (751.8 million). Correspondingly, tourism expenditure also rose by 22.7% to 3.478 trillion won. The suppressed travel sentiment due to the endemic has led to a full-fledged revenge consumption this year. In February, online transaction amounts for travel and transportation services reached 1.8275 trillion won, 2.4 times higher than the same period last year (769.7 billion won), for the same reason.

The recovery in consumption is also confirmed by sales trends in offline retail such as department stores and large supermarkets. According to the Ministry of Trade, Industry and Energy, sales of 25 major domestic retailers last month increased by 6.4% year-on-year, thanks to increased outings leading to significant growth in spending on clothing, accessories, and more. Among the three major department stores, sales last month rose 9.7% overall, driven by strong sales in women's casual wear (23.7%), accessories (20.3%), food (16.2%), and women's suits (16.1%). Domestic credit card approvals also increased by 9.0% compared to the same month a year ago, exceeding the growth rates of January (8.7%) and February (8.1%). Moreover, the number of Chinese tourists visiting Korea last month surged by 503.1% compared to a year earlier, and domestic passenger car sales increased by 20.5%. Highway traffic volume and vehicle fuel sales also expanded by 13.6% and 29.7%, respectively.

Sales in the dining-out sector also rose significantly. According to the Korea Agro-Fisheries & Food Trade Corporation (aT), the total monthly sales of the dining-out industry reached a record high of 10.6483 trillion won in December last year. This figure is meaningful as it represents an 8.27% increase compared to December 2019 (9.8348 trillion won), before the implementation of social distancing due to COVID-19. As of December last year, the number of dining-out businesses was 728,283, an increase of 5.2% (35,970 businesses) compared to three years ago, driving the overall dining market sales.

Future Consumer Sentiment Hits Highest in 10 Months

The expansion of the working-age population capable of consumption is also identified as a factor for future consumption growth. As the number of workers with spending power increases, it positively impacts corporate productivity. According to Statistics Korea, the total number of employed persons last month was 28.223 million, up 1.6% year-on-year. Notably, the proportion of wage workers among employed persons was 77.1% (21.749 million) as of last month, an increase of 1.8 percentage points compared to March 2019. The recovery in apartment sales volume, especially in the Seoul metropolitan area, is another factor that can stimulate consumption. Last month, apartment transactions in Seoul reached 2,909 cases, the highest in 19 months since August 2021 (4,065 cases). For the first quarter of this year, apartment sales totaled 6,788 cases, the highest since the third quarter of 2021 (11,439 cases). Analysts suggest that if the housing market rebounds, consumption sentiment could improve due to expected income growth.

With growing expectations for the return to normal life, future consumer sentiment is rapidly improving. According to the Bank of Korea's 'April Consumer Survey Results,' the Consumer Confidence Index (CCSI) rose by 3.1 points from the previous month to 95.1. Although the index remains below the baseline of 100, indicating a more negative than positive outlook on the economy, the absolute figure is the highest in 10 months since June last year (96.7). As private consumption increases, the government has also expressed optimism about domestic demand recovery. The Ministry of Economy and Finance's March issue of the Economic Trend (Green Book) stated that "the pace of domestic demand recovery is slowing," but the April issue signaled a rebound, saying "domestic demand is steadily 'recovering,' centered on face-to-face activities."

Private consumption becoming the main driver of economic growth is not unique to Korea recently. In Germany, after GDP growth turned negative in 2014, the economy rebounded thanks to private consumption recovery. According to an analysis by the Hyundai Research Institute, factors enabling Germany's consumption recovery included the expansion of wage workers, wage increases, a robust real estate market, low interest rates, and stable management of household debt. Except for low interest rates, these factors largely correspond to the current environment for private consumption growth in the Korean economy.

High Interest Rates and High Oil Prices Pose Challenges

However, high inflation and high interest rates are considered major variables affecting the consumption recovery trend. The rise in interest rates continues to burden household interest repayments, and nationwide housing prices remain weak. The increase in international oil prices is also a concern. OPEC+ member countries, led by Saudi Arabia, have cut oil production by more than one million barrels per day to defend global oil prices, fueling inflation. The downturn in key industries such as semiconductors is another negative factor delaying large-scale investments. Joo Won, head of economic research at Hyundai Research Institute, said, "It is highly likely that consumption has increased recently due to a strong revenge spending sentiment after COVID-19. Once consumption improves, it tends to continue." However, he added, "With weakening corporate vitality, there is a possibility of employment stagnation, so we need to monitor the situation a bit longer."

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