No time for complacency
Korean consumers have finally opened up their wallets. Department stores have begun their year-end season on a happy note, brimming with shoppers. The first to be hit during economic hard times is normally the fashion industry. Clothes are selling again. Clothing for the first time this year was included among the 10 most-purchased items through debit cards last month.
Credit-financed household spending - or expenditures from credit card services and automobile installments - increased by 3.9 trillion won ($3.4 billion) year on year to reach 63.4 trillion won in the third quarter - the largest July-September record since the Bank of Korea compiled data in 2002. In the second quarter, the figure stopped at 500 billion won amid the Middle East respiratory syndrome outbreak. The composite consumer sentiment index tracked by the Bank of Korea also has been on the rise for five straight months.
The government and central bank believe the economy will pick up next year thanks to the revival in consumption. Choi Kyung-hwan, deputy prime minister for the economy, declared the economy was recovering led by domestic demand. He predicted the economy will “sufficiently” grow 3 percent if the growth momentum continues into next year. We cannot blame him for being optimistic as confidence can shape the economy. But then again, a misled diagnosis can lead to the wrong prescription.
Nobody can be sure if the recovery can last to next year. The spending is mostly spurred by the government. The government hyped and sponsored bargain sales by retailers under different banners - Korea Grand Sale in August, Korea Black Friday in October and K-Sale in November.
Under government nagging and encouragement, retailers rolled out inventory and offered big discounts. But the spending was debt-financed. Consumers used the discount momentum to do all their shopping - even next year’s - during this period. Car sales jumped because of the special sales tax cut of 30 percent from August. The sales tax is revived on Nov. 1. The government also advanced budgetary spending to help stimulate domestic demand. The government and consumers won’t have much to spend next year.
The real estate recovery is also unstable. New housing supply that was approved this year will exceed 700,000, the largest ever since the government created the new satellite cities of Bundang and Ilsan in Gyeonggi in 1990. Construction became active. There won’t be any urban development after Wirae and Dongtan in the northeastern tip of Seoul. There is few land available for new development. The construction business won’t be as brisk as this year. Due to skyrocketing rent prices, the cost of living has jumped. After the U.S. Federal Reserve raises short-term interest rates, local borrowing rates will likely go up, more reason for consumers to tighten their belt.
If corporate investment rises, recovery in domestic demand will be sustained. But domestic manufacturers are hard-up. Since China has shifted its growth model from exports to domestic demand, Korean companies are busy trying to cut capacity rather than newly invest. Household corporate names like Samsung, Hyundai Motor and SK Group are selling unprofitable businesses to save costs. Once interest rates go up, zombie companies that entirely survive on debt will, one by one, go under.
The textbook-like benign cycle of the recovery in consumption leading to corporate investment, new hiring and renewed consumer spending cannot be expected. When this year’s spending bills come rushing in, we may see a drop in consumption next year.
The only hope could be the job market. Since manufacturers cannot afford to increase hiring, we can only wish for a breakthrough in the service sector. Tourism is a sector that has ample room for new recruitment. The Chinese are fortunately returning to Korea and happy to spend here. But the National Assembly is stopping them. Bills to promote the services sector, tourism and medical industry are stuck in legislative deadlock. The retirement age will be extended to 60 from next year. If the labor reform bill does not pass, unemployment will worsen.
There is not much time left. If this year is wasted, the National Assembly will be too preoccupied with elections to have the mind to approve the bills. This is the time to be gleeful about improvement in consumption figures.
JoongAng Ilbo, Nov. 30, Page 34
The author is the business news editor of the JoongAng Ilbo.
by Jung Kyung-min