As Posts Celebrating "Eating Well Thanks to the KOSPI Bull Market" Surge, Why Is Consumer Spending Still Sluggish? [Weekend Money]

Consumer Spending Remains Tepid Despite Stock Market Rally: Aging Population, Real Estate, and Reinvestment Hold Back Growth
Only Department Stores Benefit... Consumption Polarization Deepens Amid KOSPI Rally

Although the KOSPI continues its record-breaking rally, analysts say that the recovery in consumer spending has not been as strong as expected, as the trend of reinvesting investment returns or allocating them for retirement assets grows stronger.

"Rising Proportion of Households Nearing Retirement... ‘Asset Preservation Tendency’ Strengthens"

According to Shinhan Investment Corp., research analyst Jin Kyung Lee stated in a recent report titled "Potential Wealth Effect of KOSPI Rally on Consumption" that, "Since the 2000s, private consumption has generally revived about five to six months after stock prices rose, but even after stock prices began a significant upward trend in May last year, the growth in private consumption remains limited."

Lee analyzed that the current situation is most similar to the global economic recovery phase from November 2016 to March 2018, when increases in consumption were also limited.

The main cause identified was structural aging. In the past, during periods of rapid economic growth, rising asset prices directly stimulated greater consumption through the so-called "wealth effect." However, now, as more households approach retirement, the tendency to preserve assets has become stronger.

Lee diagnosed, "Households that are nearing or have entered retirement are more likely to prioritize savings and asset preservation over consumption, even when their asset values rise. As aging progresses, the proportion of the wealth effect that translates into increased consumption decreases."

Polarization in the real estate market is another variable. Traditionally, the wealth effect of real estate has been more significant than that of stocks in Korea. However, currently, home price increases are limited to certain areas of Seoul, with little spread nationwide. Lee explained, "The rise in real estate prices centered on Seoul is not expanding to the rest of the country, making it difficult for real estate to complement the wealth effect of equities."

"Rising Home Prices Only in Seoul Have Also Hindered the Spread of Consumption"

Another factor slowing the recovery in consumption is the recent increase in pension investments. There has been a rise in the proportion of equities within individual retirement pension accounts (IRP) and corporate retirement pensions, which are difficult to withdraw early. This has combined with the trend of reinvesting stock gains rather than spending them.

Lee pointed out, "Even now, the growth rate of cash balances remains insignificant compared to the rapid increase in domestic equity balances, suggesting that stock investment returns are being used to maintain or further increase holdings rather than for consumption. Unless these gains are realized, the link to increased consumer spending will remain limited."

Meanwhile, department store sales are rebounding. Lee commented, "Rather than interpreting this as a signal of broad recovery in Korean consumption, it is more appropriate to view it as a localized form of polarization. In the case of department store consumption, it is likely driven by higher spending among high-income groups sensitive to the wealth effect, or by demand from foreign visitors responding to the weak won."

Ultimately, this stock market rally is likely to result in only a limited improvement in consumption among certain asset-holding groups, rather than spreading into a "nationwide consumption boom" as in the past. Lee concluded, "While some improvement in consumption amid polarization is valid, the environment is still weak for a full-fledged rebound in overall consumption."

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