Small business shutdowns reach record high — and show no sign of slowing

Economy

Published: 18 Jul. 2024, 07:00

Small business shutdowns reach record high — and show no sign of slowing

Lease notices are posted to empty store spaces in downtown Seoul on Monday. [NEWS1]

The number of Korean self-employed workers and small business owners who closed shop last year — nearly 1 million — was its highest ever recorded. Experts say high interest rates and inflation influenced the downturn and predict a bleaker outlook for 2024.

A total of 986,487 sole proprietors and businesses reported shutting down in 2023, according to the National Tax Service (NTS) data released Monday — an on-year increase of 119,195, and both the highest number and highest on-year increase recorded since related data were first compiled in 2006.

The number of business shutdowns hovered in the 800,000 range from 2020 to 2022 but rapidly increased to almost a million last year.

The most commonly cited reason for closedowns was weak earnings. Some 482,183 people cited that factor as paramount in their decision this year, the second highest figure posted since the 488,792 people recorded during the financial crisis in 2007.

A total of 40,369 respondents had sold their businesses, 4,685 moved from sole proprietorship to incorporation while 451,203 cited reasons in the miscellaneous category.

By industry, retailers shuttered the most, with 276,535 people, followed by those in the service industry at 217,821 people and the food industry with 158,279. All sectors were connected to domestic demand. Many businesses related to real estate, whose market lagged last year, also shut down, including 94,330 from firms involved in leasing properties and 48,608 entities in construction.

[LEE JEONG-MIN]

Many small businesses and self-employed workers have failed to stay afloat amid low domestic demand driven by high interest rates and inflation. Others closed down last year, belatedly, after government Covid-19 subsidies halted.

The shutdown rate for businesses is only set to hasten this year as domestic demand, especially for services and goods in the food, lodging, retail and wholesale industries has not yet recovered. The retail sales index — which shows changes in consumer spending on retail goods — shot down 2.3 percent on year from January to May of 2024, according to data from Statistics Korea. This is the largest drop recorded in 15 years since 2009 during the Great Recession that followed the 2008 financial crisis.

The number of self-employed workers fell by 9,000 on year in this year’s first quarter, marking the first downturn in around two years, with the gap widening in the second quarter by 101,000. Notably, the number of sole proprietors of small businesses working alone dropped by 114,100 in the second quarter, the largest decrease recorded in eight years since the fourth quarter of 2015.

Self-employed workers unable to find jobs after closing shop are also on the rise. In the first half of this year, a monthly average of 26,000 unemployed people reported having been self-employed within a year of being surveyed, a 23.1 percent increase from the monthly average of 21,000 recorded in 2023 and three times the percentage increase recorded for total unemployment.

Pedestrians walk by shops in Myeong-dong, central Seoul, in July. [NEWS1]

The government announced a 25 trillion won ($18.1 billion) comprehensive support package aiming to aid self-employed workers and small business owners on July 3, along with its multiyear economic initiative and biannual Economic Policy Direction. Some of the principal measures include expanding the repayment period for government loans and relaxing requirements for loans.

An official from the Ministry of Economy and Finance said that “self-employed workers have been going through hard times, as evidenced by their continued drop in numbers that amounted to around 100,000 recently,” adding that the ministry would “support a new beginning for small business owners and self-employed workers by easing their financial burdens and helping them find employment.”

“With the slump in domestic demand worsening, it has become an environment where small business owners can’t hold out,” said Kim Jung-sik, a professor from Yonsei University’s economics department.

“It was actually easier to stay afloat during the Covid pandemic as interest rates were low and government subsidies were given out. It’s harder times now with consumption low but interest rates continuing to increase.”

BY NA SANG-HYEON [kim.juyeon2@joongang.co.kr]