South Korea's economy is projected to grow at a rate of over 2% this year, with the KOSPI index hitting an all-time high and key economic indicators showing improvement. Thanks to strong exports, the current account has recorded its largest surplus ever, fueling optimism about economic recovery. However, consumers are still feeling the pinch, as high prices and interest rates persist, leading to a widening gap between macroeconomic indicators and consumer sentiment.
According to the Bank of Korea on June 21, the consumer price level forecast for May was 151, significantly above the benchmark of 100 and also exceeding the long-term average of 143. The projected interest rate level was recorded at 114, while housing price expectations rose to 112, an increase of 8 points from the previous month. Despite expectations of rising home prices, concerns about interest rates and inflation remain substantial.
The burden of inflation is evident in consumer sentiment. The perception of current price levels, as indicated by the consumer trend survey, increased to 3.0% in May, up from 2.9% the previous month. The expected inflation rate for the next year was recorded at 2.8%, close to the long-term average of 3.0%, indicating that consumers anticipate continued high prices. An increase in expected inflation suggests that consumers foresee further price hikes, which could lead to actual price increases and intensify inflationary pressures.
Inflation is the primary factor weighing down consumer sentiment. The consumer price inflation rate rose to 3.1% in May, marking a return to the 3% range for the first time in 26 months. Despite a peace agreement between the U.S. and Iran, international oil prices are expected to remain high, while the won-dollar exchange rate fluctuates around 1,500 won, increasing the burden of import prices. Rising energy and food prices are particularly straining the budgets of vulnerable households.
The disconnect between asset markets and the real economy is also hindering the recovery of consumer sentiment. The recent stock market rally and rising asset prices have primarily benefited those who own stocks and real estate. In contrast, households without property or with limited assets feel the burden of rising prices more than any benefits. Particularly concerning is the growing number of 'HENRY' (High Earning, Not Rich Yet) individuals, who, despite high incomes, struggle to accumulate wealth. The proportion of high-asset, high-income individuals among young people aged 20 to 34 has dropped from about 27% in 2017 to around 20% this year, making it harder for them to move into higher asset brackets.
Economic growth appears to be concentrated in certain industries and demographics, preventing a widespread recovery in consumer spending. The anticipated trickle-down effects from the semiconductor industry's boom are also lacking. According to the Bank of Korea's Corporate Business Sentiment Index (CBSI), disparities among industries and company sizes are stark. In May, the sentiment index for export companies (105.3) and large corporations (103.4) significantly exceeded the baseline of 100, while domestic companies (98.4) and small businesses (96.2) remained below it. Notably, the June outlook index for the non-manufacturing sector, which includes self-employed individuals, fell to 95.9, indicating that the economic warmth centered on exports and large corporations has not reached local businesses.
To restore consumer sentiment, both growth and price stability must be achieved. Even with ongoing economic growth, persistent high prices could maintain the gap between macroeconomic indicators and consumer sentiment. If living costs continue to burden consumers, the pace of perceived economic recovery will inevitably slow. The Bank of Korea is also prioritizing price stability in its policy as an 'inflation fighter.' Recently, Bank of Korea Governor Shin Hyun-song expressed caution, stating, "Rising prices can elevate expected inflation and lead to a vicious cycle of further price increases. We will actively respond until we are confident that prices will stabilize at target levels."
* This article has been translated by AI.
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