KDI "Private Consumption Shows Trend of Slowing... Growth Rate Sustains in Mid-1% Range"

An analysis by a government-funded research institute has revealed that the trend growth rate of real private consumption is expected to remain in the mid-1% range, alongside a decline in potential growth rate.

Private consumption, which has recently led the sluggish domestic demand, is projected to improve only from next year.

There are also concerns that the expansion of government consumption could constrain the capacity for private consumption, calling for caution in increasing government consumption.

On the 7th, Kim Jun-hyung, Head of Trends at the Economic Outlook Office of the Korea Development Institute (KDI), released a report titled "Factors and Implications of the Slowdown in Medium- to Long-term Private Consumption Growth."

Kim analyzed changes in the real private consumption growth rate by dividing them into three factors: changes in the real Gross Domestic Product (GDP) growth rate, changes in the nominal private consumption share relative to nominal GDP, and changes in the relative price between GDP and private consumption.

The analysis showed that the potential growth rate, which was in the mid-5% range 20 years ago, has fallen to around 2%, and with prices rising faster than income, real private consumption increased by only 0.74% when real GDP rose by 1% over the past 20 years.

While the nominal total consumption share relative to nominal GDP has generally remained stable, the nominal government consumption share has been expanding, leading to a reduction in the nominal private consumption share relative to nominal GDP, which has contributed to the slowdown in real private consumption growth.

Kim stated, "Considering that the recent potential growth rate is estimated to be around 2%, the decline in the nominal private consumption share due to government consumption expansion, and the relative price decline of GDP compared to private consumption, it will be difficult to sustain a real private consumption growth rate exceeding the mid-1% range."

Unless there are significant changes in other structural factors in the future, it is highly likely that the real private consumption growth rate will trend downward along with the decline in potential growth rate.

From this perspective, the 1.3% private consumption growth rate in the third quarter of this year, rebounding from 0.9% in the previous quarter, is interpreted as moving closer to the medium- to long-term trend.

The private consumption growth rate for next year is expected to be in the high 1% range, which is lower than the actual figures from 2017 to 2019 (2.8%) and the recent potential growth rate (around 2%), but higher than the medium- to long-term growth trend, implying a mitigation of the private consumption slump.

Kim suggested, "To revitalize private consumption in the medium to long term, it is necessary to buffer the downward trend in potential growth rate through structural reforms, exercise caution in expanding government consumption, and strengthen export competitiveness to secure higher added value."

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