Boosting consumer sentimentCorporate investment sentiment has been dampened by a strong won and worsened export competitiveness coupled with an anti-conglomerate message from the new government. If exports and corporate investment turn sluggish, civilian sector consumption and fiscal spending must help drive the economy. But the presidential transition committee is directing fiscal policy to boost welfare benefits while reducing public-sector investment. As a result, however, private consumption, which accounts for 70 percent of the GDP, is also quickly receding, pushing the economy further toward the danger of a recession.
Despite the New Year sales period, department store revenue fell 8 to 10 percent from a year ago. Department stores are now dumping stock from daily necessities to baby products, and retailers have put off new openings amid signs of a spending freeze. Big-box stores, also faced with the worst-ever revenue losses in 20 years, are slashing prices by more than half in a desperate bid to get consumers to open their wallets.
Authorities estimate that private consumption could rise nearly 3 percent later this year. But even if that does happen, it would mean spending similar to the gain of 2.6 percent in 2009 following the global financial crisis and 2.8 percent in 2003 after the credit card bubble burst. The snail’s pace of growth in private consumption - despite a rise in real wages and stable consumer prices - underscores the poor consumer confidence in the economy.
Behind the sluggish consumer sentiment is colossal household debt and plummeting housing prices. Despite a lowering of the benchmark interest rates, debt remains high when compared to income levels. Reduced affordability put a dent in consumer spending. The older generation is keeping spending to minimum in fear of financial insecurity after retirement.
Consumption is driven by sentiment. Careful efforts to improve sentiment are necessary to fuel consumption. The National Assembly should pass a bill to extend exemptions on housing acquisition and registration taxes and lift levies on multi-home owners. If there is no price pressure, the central bank should not hesitate to lower the benchmark rate further. It should send a strong message that it is intent on saving the consumer market. The government must also match those efforts with fiscal action and propose supplementary budget increases.
Timing is everything in policy-making. Japan’s stimulus measures were in vain because they missed the right moment. If we delay, a vicious cycle of recession will begin. If Koreans want to avoid a lost decade, we must act now.