Korea's household savings plummet to decade low

Economy

Korea's household savings plummet to decade low

Published: 24 Aug. 2024, 06:00

A bag of apples is priced at 10,240 won ($7.7) at a supermarket. [YONHAP]

Korea's household savings have plummeted to a decade low amid prolonged inflation and rising interest rates.

Many households, struggling with increased financial burdens, have also found themselves unable to keep up with expenses, leading to a record-high level of household debt.

The nation's net household savings last year hit 4 percent, indicating that 4 percent of all Korean households' disposable income was saved, rather than spent. The figure reflects a 2.3 percentage point drop from the previous year's 6.3 percent and the lowest level since 2013, when the figure reached 3.7 percent, according to data compiled by Statistics Korea and the Bank of Korea (BOK). Net household savings measures a household's discretionary spending capacity after essential expenses, with lower savings indicating reduced disposable income.

Net household savings had been on an upward trajectory, reaching 11.4 percent and 9.1 percent in 2020 and 2021, respectively, due mainly to reduced spending during the Covid-19 pandemic, government cash stimuli and decreased spending on in-person activities including travel and accommodation. The brief upward trend, however, has reversed since then, as inflation has risen by 3.6 percent while nominal household incomes increased 2.5 percent, translating into a decline in real incomes.

Small business owners protested against high interest rates and soaring debt near the National Assembly building in Yeouido, western Seoul. [YONHAP]

Adding to households' financial burden are record-high household debt and high interest rates, with the benchmark standing at 3.5 percent. The total household credit balance reached a new high of 1,896.2 trillion won ($1.42 trillion) in the second quarter of this year, the highest figure since the BOK began compiling relevant data, which resulted in average monthly household expenses on loan interest shooting up 31.7 percent year over year.

“I was able to spend more money until about three years ago during the Covid-19 pandemic due to reduced spending and low interest rates. But now I feel like I spend about a half of my monthly salary on paying off my debt and interest,” an interviewee surnamed Lee told the JoongAng Ilbo, an affiliate of the Korea JoongAng Daily.

“People have to spend on necessities, making it difficult to cut down on expenditures below a certain point,” said Ha Jun-kyoung, an economics professor at Hanyang University. “If their income doesn't keep pace with rising expenses, they may need to strike a balance by reducing savings or taking on more loans.”

BY OH HYO-JEONG, YOON SEUNG-JIN [yoon.seungjin@joongang.co.kr]