Economic Uncertainty Freezes Consumer Spending

Im Hyeong-uk, a 33-year-old salary man, was surprised to see how things have changed since earlier this year when he met his college friends a few days ago. They used to go to a Korean BBQ restaurant for dinner first, then have a beer at the pub and finally end the day singing at a karaoke bar. This time however, they just stayed at the BBQ place and drank soju there instead of going to a pub. Nobody was offering to pay for dinner as they would normally do.

Im said, “The economy is still stagnated and the overall atmosphere is gloomy with restructuring and other things going on. I’m afraid to open my wallet.”

He is not the only one unwilling to spend. Many others, whether they are rich or not, have kept their wallets closed tight. Consumer sentiment, which started to drop since late last year, has been getting worse and is certainly not getting better anytime soon.

In 1998 right after the financial crisis, Hyundai Department Store in Apgujung, Seoul suffered a year on year two percent drop in its sales. However, during January to September this year, the department store saw a 2.5 percent decrease compared to the same period last year. Managing Director of the department store Kim Jung-sun said that the sales at all department stores are falling by 5 percent every month and added, “During the financial crisis, rich people were still willing to spend because they could profit from high interest rates. These days however, they have put their priorities on saving because interest rates are low and there are no attractive areas to make investments.”

Frozen Consumer Sentiment

Businesses targeting the general public are suffering even more. Milliore, a low price clothing shopping mall, have boomed since 1998. However, it sold its parking structure in Myeongdong this September and announced that it will let go of its Daegu and Gwangju branches. The shopping mall expects its sales revenue to plunge to 30 percent of its sales in 1999.

Even the economic experts were surprised to see the contraction in consumer sentiment. According to “Consumer Expectations in September” released by the National Statistical Office on the October 14, the consumer evaluation index, a barometer of consumer views on current economic conditions, plunged to 59.9-- the lowest since the statistical office started compiling the data in November 1998.

Research Associate at the Korea Institute of Finance Park Jong-kyu said, “It dismays me that the September consumer confidence indexes came out to be worse than expected. Consumption contracted even more because of unpaid household debts and reductions in real income.”

The Bank of Korea announced that the consumption of durable goods such as automobile, television, refrigerator and air-conditioner decreased by 10.0~28.3 percent early this year compared to the same period last year. The growth rate of private consumption, which used to be higher than the economic growth rate, plummeted since the fourth quarter last year and recorded –2.2 percent in the second quarter (April to June) this year, pushing down the economic growth rate.

The Wealthy Going Abroad

Some people with deep pockets are consuming expensive imported goods and going abroad to spend money. A 40-year-old businessman living in Gangnam, the wealthiest area in Seoul, visits Japan or Thailand to play golf. He claims that it only cost him one million Won, including flight tickets and accommodation, to play golf with better facilities and services in Nagasaki or Shanghai. The sales of imported cars or golf-related goods are continuously on the rise in Gangnam.

Kim Sung-yup, General Manager at Hana Bank of Baekgoong branch in Bundang, said that there are a number of rich people who almost doubled their assets through the financial crisis. The wealthy have not reduced their spending as much as the middle class households and the young have - dramatically cut down on spending. In addition, even with the middle income households’ spending money to send their children abroad for education, consumption abroad has increased which leads to more reductions in domestic consumption.

Managing Director at Samsung Economic Research Institute Jung Moon-gun said, “Despite the recovery of the world economy and increase in exports, the Korean economy is not showing signs of rebound because of the contraction in consumption.” He pointed out that the government must provide a full-scale debt control plan for credit delinquents and map out measures to facilitate job creation and investments.