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Rising saving rate without consumption

Posted June. 24, 2015 07:20,   


The aggregate savings rate, the ratio of income that remains unused from the gross national disposable income, was found to be 36.5 percent in the first half of this year. This does not mean that money that they actually saved in the bank amounted to 36.5 percent, but that if they earn 1 million won (900 US dollars), they leave unspent about 360,000 won (320 dollars) of their total income. The reading in the first half alone was the highest in 17 years since 1998, and was an increase of 1.5 percentage point from the same period of last year. The statistics illustrate the reality that people are avoiding opening their wallet to spend, and instead keeping money in their bank accounts.

Since the aggregate savings rate rose to hit 41.7 percent in 1988, Korea had been on the decline. But the nation has seen its course rise for three consecutive years from 2013 to 2015. Even though people had money, they cannot afford to spend means because they have more anxiety about their futures. This stems from sluggish income growth caused by a protracted economic recession, a hike in household debts and rising prices of jeonse (rental home based on lump sum key deposit), and need to prepare for the post-retirement period. National pension payments that they will receive are hardly an amount sufficient enough for them to depend on for their post-retirement period. “As the duration of life after retirement has increased, people in almost all age groups are lowering their propensity to consume to prepare for their post-retirement era,” the Korea Development Institute said last year. "When people in their 40s and 50s at present become seniors, chances are high that domestic consumption will become even more sluggish."

In Japan, this trend became more obvious during the era of "Lost two decades" that started when bubble economy burst in the early 1990s. The rising aggregate savings rate in Korea means that Koreans who believed that they would have a tomorrow better than today during the period of robust economic growth since the 1960s are now worrying that "they are not certain whether their children’s generation will have a life better than theirs."

A high savings rate had positive effect in the early phase of economic development because it helped amassing of funds needed for investment. However, if the economy grows beyond a certain scale, it cannot blindly welcome a hike in savings rate. This is due to the "paradox of savings," in which when consumers reduce consumption and increase savings, it slows domestic consumption and helps contract economic activities, which in turn drives the economy into general recession.

In the wake of the MERS fiasco in recent weeks on top of a sluggish economy, consumer sentiment that was already weak is deteriorating further. Chairmen of the Korean Chamber of Commerce and Industry held an emergency meeting on Monday, and launched a campaign to expedite consumption including promotion of domestic travels during vacations, and awarding of gifts with local specialty produce. The government and the political circle including the ruling and opposition parties reached consensus on setting an extraordinary budget despite the risks of rising national debt, because they judged that they cannot afford to leave sluggish domestic consumption unaddressed. It is about time that both the private and public sectors joined forces, and made all-out efforts to revive the bud of growth, and recover confidence in the future.