A Financial institution of Korea (BOK) evaluation reveals that South Korea is the one nation the place personal consumption has declined regardless of family debt rising greater than 10 % over the previous 10 years. The interpretation is that households tightened their belts because the burden of principal and curiosity funds elevated resulting from extreme borrowing to buy housing. The central financial institution estimated that if family debt had been managed on the 2012 degree, personal consumption would have grown 5 % extra.
Based on the report “The Affect of Actual Property-Pushed Family Debt Accumulation on Consumption,” launched by the BOK on Nov. 30, South Korea’s family debt-to-gross home product (GDP) ratio rose 13.8 share factors from 2014 to 2024, the third highest on the planet after China and Hong Kong. Amongst international locations the place the debt ratio surged by greater than 10 share factors, South Korea was the one one during which the personal consumption share as an alternative declined by-1.3 share factors. In international locations the place family debt rose sharply like South Korea, personal consumption typically elevated as properly.
Nonetheless, in South Korea, family debt relatively suppressed personal consumption. The central financial institution analyzed that the regular rise in family debt over the previous 10 years lowered personal consumption by 0.40 to 0.44 share factors annually beginning in 2013. It estimated that if the family debt-to-GDP ratio had remained on the 2012 degree, final 12 months’s personal consumption would have been 4.9 to five.4 % greater than in actuality.
The principle motive recognized for the contraction in consumption was the debt service ratio (DSR), which rose on the second-fastest tempo on the planet. From 2014 by final 12 months, South Korea’s DSR elevated by 1.4 share factors, rating second after Norway, which recorded 5.9 share factors. In different phrases, the tempo at which month-to-month principal and curiosity funds elevated was quicker than the tempo of earnings progress.
A BOK official stated, “Consumption constraints brought on by family debt are anticipated to persist in the interim,” including, “The family debt drawback doesn’t trigger a sudden disaster like a myocardial infarction, however relatively progressively shrinks consumption like arteriosclerosis.”
