Government policymakers are racking their brains to work out measures to boost domestic consumption to prop up the country’s sluggish economy. Briefed on 2016 economic policies last week, President Park Geun-hye urged them to step up efforts to expand domestic demand.

While trying to bolster domestic spending, policymakers may be put into a dilemma over the country’s increasing savings rate.



According to data from the Bank of Korea, the nation’s total savings rate rose from 35 percent in the first quarter of 2014 to 36.5 percent in the same period of 2015, the highest quarterly figure in 17 years. The rate slid to 35.3 percent in the second quarter of last year before climbing back to 35.8 percent in the following three-month period.

The increase in total savings ― the amount of gross national disposable income minus consumption and other expenditures ― may be seen as desirable, given Korea’s households and businesses are saddled with mounting debts, which many economists note are posing the most serious potential risk for the country’s economy. Out of concern over ballooning household debt, estimated to be close to 1.2 quadrillion won ($1 trillion), financial authorities last month came up with measures to tighten rules on mortgage loans.

The rising savings rate, however, may have a negative impact on the efforts to boost domestic demand as it means households are tightening their belts partly due to uncertainty over the future.

The increase in savings rate in the third quarter of 2015 came as the government was churning out a package of measures to bolster consumer spending, including holding nationwide discount sales events and cutting excise tax rates.



Savings rates tend to become lower in stable advanced economies with larger proportions of consumption in income. The figures for the U.S. and Britain stood at 18.3 percent and 12.8 percent, respectively, in 2014. The European Union and Japan recorded rates of 22.3 percent and 21.1 percent each in 2013.

Korea’s total savings rate does not seem excessively high compared with other emerging economies ― the number for China is as high as 48.8 percent ― but it may well be a concern for policymakers that households have taken the lead in its upward trend in recent years.

Data from the BOK showed the country’s household savings rate rose from 5.3 percent in 2011 to 7.1 percent in 2014, with the corresponding figures for businesses and the government decreasing by 2 percent and 14 percent, respectively, over the cited period. Analysts presume that such contrasting trends continued through last year, for which related data have yet to be compiled.

According to figures from the Organization for Economic Cooperation and Development, the household savings rate remained at 4.8 percent for the U.S. and 6.5 percent for the EU in 2014.

The increase in savings is also reflected in Statistics Korea’s figures showing the average household consumption propensity ― the ratio of net consumption to disposable income ― decreased for four consecutive years since 2011, hovering at 71.5 percent in the July-September period of last year.

“It should be understood not as a temporary trend but as a structural phenomenon that the country sees a rise in savings rate matched with a decrease in consumption propensity,” said Kim Dae-jong, an economics professor at Sejong University in Seoul.

Experts cite different reasons for the increase in savings in accordance with the different levels of household income.

Low-income families are being compelled to further tighten the purse strings under mounting debt burden, while many middle-income households feel an increasingly urgent need to prepare for retirement with concerns growing over the long-term viability of national pension funds as life expectancy continues to be prolonged.

It is notable, however, that consumption propensity among the top 20 percent income group increased from 57.9 percent to 61.3 percent over the first nine months of 2015, while the corresponding numbers for all other households fell throughout the same period.

In this regard, economists call for more sophisticated policies tailored to the specific conditions of different income groups.

It is necessary to work out various ways to help increase disposable income of low-income and working-class households so that they can afford more consumption while setting aside money to pay debt and prepare for retirement. More consideration needs to be given to helping reduce their housing and education costs, economists say.

At the same time, the environment should be forged to encourage high-income earners to spend more at home than abroad, they note. 

By Kim Kyung-ho
(khkim@heraldcorp.com)