South Korea's economy has recorded higher-than-expected growth, bolstered by a semiconductor boom, but household consumption remains sluggish. With household loan rates approaching 5% and private consumption declining, a growing gap is evident between economic growth and consumer sentiment. Concerns are rising that the Bank of Korea's potential further tightening could hinder domestic recovery.
According to the Bank of Korea on November 1, the household loan rate for new transactions at deposit banks rose to 4.96% in September, an increase of 0.20 percentage points from the previous month. This marks the highest level since November 2023 (5.04%) and the first time it has exceeded 4.90% since April 2023 (4.43%), reflecting a continuous rise for five months.
The mortgage rate, which constitutes a significant portion of household loans, increased to 4.88%, up 0.22 percentage points from the previous month, reaching its highest level since April 2012 (4.94%). Notably, the fixed-rate mortgage surpassed 5% for the first time since records began, now standing at 5.11%. The general credit loan rate also rose to 6.49%, an increase of 0.16 percentage points from the previous month.
As household loan rates rise, concerns about increased interest burdens are growing, coinciding with a decline in private consumption. The Bank of Korea's preliminary estimate for third-quarter real GDP, released on October 27, indicated a 0.2% decrease in private consumption compared to the previous quarter, marking the first negative growth since the fourth quarter of 2022.
In contrast, GDP growth for the same period was 1.0%, exceeding the Bank's previous forecast of 0.3%. This growth was driven by a 4.1% increase in facility investment and a 2.3% rise in exports, fueled by strong semiconductor exports. However, the benefits of this growth have not translated into increased household consumption.
The Bank of Korea attributed the decline in private consumption in the third quarter to temporary factors such as reduced stock trading volumes and strikes in the automotive sector. Excluding these factors, private consumption is estimated to have increased by 0.4%. However, even accounting for these anomalies, the recovery in consumption is not considered robust.
The concern now is the possibility of further interest rate hikes. After raising the benchmark rate consecutively in July and August, the Bank of Korea held it steady at 3.00% in October. However, given the unexpectedly high growth rates and inflationary pressures, the likelihood of an increase in November cannot be ruled out. As the effects of monetary policy take time to manifest, the burden on households from rising rates may increase in the future.
While there are expectations that improved performance from semiconductor companies and large bonuses will support consumption next year, there are concerns that if the benefits of growth are concentrated among certain groups, it may limit overall recovery in household consumption. Particularly, high loan rates and the negative asset effects from falling stock prices could slow the improvement in consumer sentiment.
Lee Jeong-hoon, a researcher at Daishin Securities, stated, "The trickle-down effect from high nominal growth rates will certainly be seen, but it is likely to remain concentrated rather than widespread. Considering the impact of rising rates and the negative asset effects from the sharp decline in stock prices in the second half of this year, the overall consumer sentiment may not improve significantly."
* This article has been translated by AI.
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