- We forecast that in 2022, real household spending will grow by 2.8% in South Korea, reaching KRW792.9trn (2010 prices), then growing by 2.6% y-o-y to KRW813.1trn in 2023.
- The high frequency data illustrates consumer concerns about interest rate rises and an imminent recession. Consumer confidence has fallen since May 2022, and retail sales growth was negative for the first time since December 2020.
- Several risks to the forecast include elevated inflation, increased commodity prices and the possibility of new Covid-19 variants, which could lead to the reinstatement of Covid-related restrictions.
Outlook For 2022 and 2023
We forecast that real household spending in South Korea will increase by 2.8% y-o-y in 2022, reaching KRW792.9trn (2010 prices), then growing by 2.6% y-o-y to KRW813.1trn in 2023 This will be lower than the 4.1% y-o-y growth forecast for 2021, but the growth in 2021 reflected heightened consumer enthusiasm following a prolonged lockdown period during the Covid-19 pandemic. In 2023, the moderation of real household spending is largely reflecting the start of a period of stability following the period of volatility in terms of spending patterns that took place during the pandemic.
Spending Growth Normalising In 2022
South Korea - Total Household Spending, Real Growth, % y-o-y (2019-2026)
High Frequency Data: Retail Sales And Confidence Have Fallen Since May
Following a period spanning more than a year when consumer confidence was above the 100 level, the consumer confidence index has fallen from 102.6 in May to 96.4 in June and then to 86.0 in July 2022 (latest data available). The recent fall is due to consumer fears that a recession is imminent, as shown by rising inflation and increased debts. The reduced confidence is reflected in the retail sales data, since in June 2022 (latest data available) retail sales were down 1.5% y-o-y. This marks the first time that retail sales growth was negative since December 2020 when sales were down 2.1% y-o-y. The high frequency data could indicate that South Korea is set to experience a period of economic instability in terms of consumer spending and confidence.
Consumer Spending And Confidence Fell In Q222
South Korea - Retail Sales Vs Consumer Confidence (2019-2022)
Insight Into Consumer Spending
Our forecast for consumer spending growth year-on-year in South Korea in 2022 is in line with our Country Risk team’s forecast that the South Korean economy will grow by a real rate of 2.6% y-o-y over 2022. An increase in vaccinations and easing of containment measures will boost consumer spending in 2022, but this will be offset by increased commodity prices, supply disruptions and reduced global demand. In addition, South Korea’s rising public and private debt levels could jeopardise growth as well as increased inflation. In 2022, unemployment will fall to 3% of the labour workforce, and improvements in the labour market will help to maintain private consumption. Economic growth will be helped by low unemployment and increased tourism, since we expect tourist arrivals to grow by 64% y-o-y in 2023. Risks to the growth outlook include the possibility of another Covid-19 outbreak which could inhibit domestic growth, and a sharper slowing of growth in China, which poses a threat to South Korea’s export sector.
According to our Country Risk Team, the Bank of Korea (BoK) will increase its key policy rate 3.25% in 2022. As the economy stabalises following the pandemic, we expect the BoK to pursue a normalizing monetary policy. As a result, the Country Risk team does not expect aggressive hikes given the high private debt levels and an expected easing of supply-side inflationary pressures expected in H222.
|Real GDP (% chg y-o-y)||2.6||2.5|
|Unemployment (% of total labour force)||3.0||3.2|
|Consumer price inflation (% y-o-y, ave)||5.3||3.5|
|Total tourist arrivals, '000 % y-o-y||200.4||327.5|
Inflationary pressures continue to build. Over the latter half of 2022, inflation is beginning to shift into services, such as tourism. Rising consumer price inflation has been the key risk to consumer spending over 2022, and it has been eroding purchasing power and shift consumer spending away from discretionary spending. This is the economic reality that consumers enter into in 2023. Inflationary pressure started to rise globally in 2021, as base effects, higher commodity prices and supply-chain challenges create localised shortages. The Ukraine-Russia conflict has also significantly impacted the global supply prices of key commodities, such as oil and gas, fertiliser, wheat, corn and barley. The commodity price increases are already feeding through into higher consumer prices and will continue to over 2022.
Inflation has continued to increase steadily in South Korea, with the latest data for July 2022 showing an increase to 6.3% y-o-y, up from 6% in June and 5.4% in May. Food price inflation has also increased, from 3.3% in March 2022 to 8.0% in July 2022 (latest data available). This increase shows the impact of the global supply-chain disruptions which will be a key risk to consumer spending over 2022. Our Country Risk team forecasts inflation to average 5.3% y-o-y over 2022, before moderating down to 3.5% y-o-y in 2023.
Inflation Has Been Ticking Higher In Recent Months
South Korea - Consumer Price Inflation & Food Price Inflation, % y-o-y (2018-2023)
Household Debt Outlook
Household debt levels in South Korea remain some of the highest in the world, with household debt-to-Disposable Income at 169% by the end of 2020 (latest available data). As repo rates and interest rates begin to rise, so too will debt servicing costs. This would mean households will increasingly have to allocate disposable income towards debt financing, placing downward pressure on consumer spending going forward. The majority of Korean debt is long term, such as in mortgages, and the property market has recently started to show the strain. If interest rates increase this will create a shift towards debt service burden, resulting in reduced consumer spending over the forecast period (2022-2026).
Korean Households Have High Debt Loads
Korea - Household Debt And Interest Rates (2018-2023)
In May 2022, the South Korean government unveiled plans to provide more fuel subsidies to truck and taxi drivers that are struggling due to the recent increase in the price of diesel. According to the South Korean finance ministry, the subsidy will help relieve the financial burden of rising fuel costs. The decision was made as diesel prices recently surpassed gasoline prices for the first time in over a decade, due to supply disruption caused by the Russia-Ukraine war. From June, the threshold price set for subsidy payments was lowered to KRW1,750 (USD1.37) per liter from KRW1,850.
Wider Economic Challenges
Supply chain issues continue, having first appeared when economies globally started to reopen in 2021, with consumers demanding products that they had little access to over 2020. This has and continues to place pressure on manufacturers, with bottlenecks and consumer good shortages emerging, which has feed through into supply-side inflation. The global semiconductor shortage, for example, will continue through 2022 and into 2023, putting pressure on the supply of multiple consumer goods. In 2022, the risks surrounding Covid-19 have moderated, as population immunity (from vaccines and prior infection) combined with less severe variants have meant that death rates have remained low through recent infection waves. This has seen many markets globally adopt a more 'live with Covid-19' approach to movement and operating restrictions, although some markets are retaining a zero-Covid policy.
More transmissible variants of Covid and Mainland China’s own zero-Covid are causing the disruption/closure of factory production and manufacturing across the world. Manufacturers are facing shortages of key components and higher raw materials costs. Inventory levels are increasing, as consumer demand shifts away from products and into services (such as tourism). This will elevate some price pressures, as companies offload stock at a discount. Finally, the Russia-Ukraine conflict continues to place significant supply pressures on key commodities, especially food supplies, pushing up final market prices across a spectrum of consumer categories. Some markets (such as India, Malaysia and Argentina) have reacted by placing their own restrictions on the export of food items, putting further pressure on global prices. The graphic below highlights some of these risks to outlook impacting South Korea’s consumer market in 2022 and into 2023.
In order to track our analysis of consumer spending in South Korea during the Covid-19 pandemic and our recovery projections please see:
- South Korea Consumer Outlook: Consumer Spending Will Improve In 2022 Although High Household Debts And Rising Inflation Present Headwinds To Growth
- South Korea 2022 Consumer Outlook: Spending Will Breach Pre-Covid-19 Levels
- South Korea 2022 Consumer Outlook: Easing Restrictions To Accelerate Consumer Spending Growth
Covid-19 2021 Impact Assessment
- South Korea Recovery Update: E-Commerce The Clear Winner
- Consumer Outlook 2021: Robust Recovery In South Korea's Consumer Spending
- Korean Consumer Recovery Getting Underway In 2021
- 2021 Recovery Assessment: Korean Consumer Emerging From Covid-19
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