South Korea's economy recorded a higher-than-expected growth rate in the third quarter of this year, but consumer spending declined for the first time in three years and nine months. Strong semiconductor exports drove increased capital investment and economic growth, but it will take time for improved corporate performance to translate into higher household income and consumption.
According to preliminary data on real Gross Domestic Product (GDP) released by the Bank of Korea on October 27, private consumption fell by 0.2% compared to the previous quarter. This marks the first decline in consumer spending since the fourth quarter of 2022. Consumption of goods, including automobiles and home appliances, as well as services such as finance and dining, also decreased.
While domestic demand contributed 0.9 percentage points to overall growth in the third quarter, this was not due to an increase in household consumption. Capital investment and government spending boosted growth by 0.4 percentage points and 0.3 percentage points, respectively, while private consumption reduced it by 0.1 percentage points.
Two main factors were identified as direct causes of the decline in private consumption. First, a slowdown in stock trading, which had been increasing since last year, led to reduced financial services consumption following a market correction in July. Additionally, a full strike by automobile manufacturers delayed vehicle deliveries, resulting in decreased car consumption. Lee Dong-won, head of the Economic Statistics Division at the Bank of Korea, stated, "Without these two exceptional factors, private consumption would have increased by 0.4% instead of declining by 0.2%."
The Ministry of Economy and Finance explained that the base effect from high oil price relief payments and discount events in the home appliance sector, which boosted consumption in the second quarter, also played a role. The temporary increase in consumption from the previous quarter was adjusted in the third quarter. The Bank of Korea noted that car consumption has significantly recovered in October. However, the recovery of financial services consumption depends on how long the stock market correction lasts.
Nonetheless, it is difficult to attribute the consumption slump solely to temporary factors. Lee assessed that even excluding exceptional factors, the improvement in private consumption is not strong. Structural issues such as household debt burdens and an aging population are constraining consumption recovery. Regarding the impact of the recent two interest rate hikes on consumption, he explained that it is still too early to judge, considering the lag effect of monetary policy.
A gap between overall income growth and household consumption has also emerged. In the third quarter, real Gross Domestic Income (GDI) increased by 3.4% compared to the previous quarter, significantly outpacing the GDP growth rate of 1.0%. The year-on-year growth rate of 18.8% is the highest since the fourth quarter of 1977, driven by improved trade conditions due to rising export prices and falling import prices. However, the increase in overall real purchasing power has not directly translated into higher household consumption.
While semiconductor companies have seen significant increases in operating profits since the first quarter of this year, it will take time for these profits to reach households through dividends or bonuses. The semiconductor industry also has a relatively small employment expansion effect from increased production and exports. Lee explained that there is an inevitable lag in the transmission of corporate income to the government and households.
The Bank of Korea forecasts that private consumption will gradually recover from the fourth quarter of this year into the first quarter of next year. Large-scale dividends and bonuses from semiconductor companies are expected to boost household income. Additionally, the expansion of transfer payments in next year's government budget is anticipated to positively impact consumption recovery. If international oil prices stabilize and the exchange rate declines, reducing import price burdens, household purchasing power may improve. However, if the stock market correction persists, the recovery of financial services consumption may be delayed.
Lee stated, "Starting in the fourth quarter of this year, cash dividends from semiconductor companies will be paid, and bonuses will be distributed in the first quarter of next year, which will contribute to increasing overall household income in our country. This is expected to have a positive effect on private consumption as well."
* This article has been translated by AI.
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