[Red Light on Domestic Demand] Prices Rose More Than Salaries, and Debts Must Be Repaid... Households Have No Money Left to Spend

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Mr. Park Hee-cheol (pseudonym), in his 40s and working in Seoul, earns about 10 million KRW per month (excluding taxes) together with his wife. However, he spends 6 million KRW of that on principal and interest repayments for his apartment loan. This is the result of taking out a "Yeongkkeul" (borrowing to the limit) loan when purchasing a 30-pyeong (approximately 99 square meters) apartment in Seoul three years ago. After living expenses, there is almost no money left to spend, and recently, with apartment prices falling, he hesitates even more to open his wallet. Ms. Kim Ji-hyun (pseudonym), a public servant working in Sejong City, mostly has lunch at the company cafeteria. After seeing that the price of Sundaeguk (Korean blood sausage soup) at a nearby restaurant near the government office rose to 12,000 KRW since the new year, she exclaimed, "Now I'm even afraid to eat Sundaeguk, which is supposed to be an affordable dish," lamenting the brutal rise in dining-out prices.

Although the government has declared through the '2024 Economic Policy Direction' that it will put all efforts into 'reviving domestic demand,' economic experts have two main reasons to be concerned that this year's domestic demand outlook cannot be viewed through rose-colored glasses. First, households have less disposable money to spend due to principal and interest repayments on real estate loans, and second, the inflation rate has outpaced wage increases over the past two years, making it burdensome to open wallets.

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According to the Bank of Korea's '2023 Q3 Financial Flow (Provisional)' statistics released on the 11th, the net financial asset management of households and nonprofit organizations in the third quarter of last year was 26.5 trillion KRW, down by 7.3 trillion KRW from 33.8 trillion KRW a year earlier. It also decreased by 2.1 trillion KRW compared to the previous quarter (28.6 trillion KRW). Net financial asset management refers to the amount of funds managed through deposits, stocks, bonds, insurance, etc., minus loans from financial institutions, representing the economic agents' surplus funds.

The biggest reason for the decrease in surplus funds is identified as 'real estate transactions.' Due to the government's easing of real estate loan regulations, more households sold stocks or took out loans from financial institutions to buy and sell houses, leading to a reduction in household surplus funds. As seen in such cases, real estate loans and the resulting interest burden play a role in tightly restricting household consumption capacity. The household debt-to-disposable income ratio rose from 188.2% in 2019 before COVID-19 to 197.8% in 2020, peaking at 209.8% in 2021. Although the debt ratio slightly eased to 203.7% in 2022, household loans, including mortgage loans (51.6 trillion KRW), increased by 37 trillion KRW last year.

Another reason holding back household consumption is the inflation rate exceeding wage increases. Looking at the past five years, wage increase rates from 2019 to 2021 were 4.5%, 1.2%, and 3.9%, respectively, higher than inflation rates during the same period (0.2%, 0.4%, and 3.2%). However, the situation changed from 2022. After the pandemic, the money supply triggered inflation, resulting in two consecutive years of high inflation at 6.0% and 3.9%, while wage increases were only 3.8% and 3.4%. The living cost index, which affects perceived inflation, rose even more than the consumer price index. Using 2020 as 100, last year's consumer price index increased by 11.5% to 111.59 over three years, but the living cost index jumped 13.6% to 113.69.

The nominal wage growth rate is failing to keep up with the inflation rate. According to the Ministry of Employment and Labor, the average monthly total wage per worker from January to October last year increased by 2.7% compared to the same period the previous year, but the real wage adjusted for inflation decreased by 1.0%. A similar trend is likely to continue this year. The 2024 minimum wage increase rate is the second-lowest ever at 2.5%, while the government expects inflation to be higher at 2.6% this year.

In the midst of domestic demand stagnation, the situation for self-employed individuals is even worse than for wage earners. Last year, self-employed loans exceeded 1,000 trillion KRW, and the delinquency rate on self-employed loans is rapidly rising. According to the Bank of Korea's household debt database, the estimated delinquency rate on self-employed loans was 1.24% at the end of the third quarter last year, up 0.55 percentage points from 0.69% at the end of the previous year. The proportion of delinquent borrowers' loans among all self-employed loans also rose sharply to 2.47%, up 1.13 percentage points from 1.35% at the end of the previous year. Vulnerable borrowers, defined as low-income and low-credit self-employed individuals holding three or more loan products, approach 390,000 people.

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