Slack consumer spending drags down economy

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Slack consumer spending drags down economy

The continued stagnation of consumer spending has eliminated jobs and lowered the nation’s growth potential, according to a report by Hyundai Research Institute.

Between the 1997 Asian financial crisis and 2011, 960,000 jobs have been lost while the economy’s growth potential decreased by 0.5 percent every year, the report said.

During the same period, while the national economy grew 4.2 percent, consumer spending only increased 3.1 percent.

These figures are significantly smaller than those for the time period from 1990 to 1997. During those years, consumer spending grew 7.4 percent, roughly on par with overall economic growth of 7.5 percent.

The research institute noted that one of the biggest culprits for the reduced consumer spending was significantly decreased growth in income along with other increased burdens on Korean households.

On average, income grew 6.9 percent between 1990 and 1997 but only grew 0.8 percent between 1997 and 2011, the report said. Real wages, which grew 5.7 percent during the earlier time frame, dropped 1.5 percent in the more recent years.

Additionally, the number of people who were newly employed between 1990 and 1997 was more than 440,000, whereas this number fell to 216,000 in the latter years.

Spikes in inflation that coincided with periods of economic crisis contributed to retarded income growth, the report said. It also singled out the reduced value of financial assets after the fall of the stock market and the frozen real estate market triggered by the 2008 financial crisis. These issues encouraged consumers to shut their wallets tight, researchers found.

At the same time, the interest burden for household loans in the country rose from 34 trillion won ($29 billion) in 2002 to 55 trillion won as of last year.

Smaller incomes and fewer assets have pushed consumers out of the middle class in recent years.

The middle class, which previously accounted for 75 percent of the population, fell to 67.7 percent of Koreans as of last year. During the same period, the ranks of the lower income class grew from 7.1 percent in 1990 to 12.4 percent last year.

The report stressed the importance of encouraging responsible consumer spending in rekindling economic growth. If consumer spending were to grow as much as the GDP, this would help create more than 250,000 jobs that would add 2.5 percent to the nation’s employment rate, it said. It would also push the economy’s potential growth rate to around 5 percent.

The Hyundai Research report was released as the government has been emphasizing the need to expand the domestic market as uncertainties have grown abroad thanks to the sovereign debt crisis in Europe and China’s slowing economy. Outbound shipments account for more than 50 percent of the GDP, and a cooling in global demand could have a very significant impact on Korea’s economic growth.

Bank of Korea Governor Kim Choong-soo recently stressed that the condition of domestic market will help determine if the economy can reach the government goal of 3.5 percent growth.

By Lee Ho-jeong [ojlee82@joongang.co.kr]

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