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[2015-8] Analysis of Background behind the Sluggishness of Household Consumption since the Global Financial Crisis

Group :
Research Department 2016.01.31 3898

   The relationship between income and consumption is weakening, as consumption is sluggish relative to the pace of income increase amid the slowdown in growth since the global financial crisis. This weakened relationship between income and consumption needs to be kept in mind, since it can have a continually negative impact on the Korean economy’s growth potential. In this paper the weakening of the relationship between household incomes and consumption before and after the global financial crisis, and the factors causing it, are analyzed in various ways.

 

   The results of an empirical analysis of households’ income and their consumption patterns show that the interconnectedness between them has weakened significantly, and that consumption in particular has undergone structural changes. By household group, this weakening is more obvious among vulnerable households ─ those whose householders are low-income, elderly or self-employed. The factors behind these changes can be separately examined in terms of consumption capacities and of propensities for consumption. Since the global financial crisis households’ consumption capacities have decreased in line with their higher non-consumption expenditures due to increased debt-servicing burdens and housing expenses. At the same time, the greater incentives for precautionary savings by the elderly, the weakened income bases of vulnerable households and the worsened expectations in line with the economic slump have caused households’ propensities for consumption to weaken substantially.

 

   In order to boost household consumption it is important above all to strengthen the household income base through increases in employment and wages. To restore the relationship between household income and consumption an overall examination of both micro- and macroeconomic policies is also necessary. First, considering the huge debt-servicing burdens of households, the rate of growth in household debt needs to be controlled within a tolerable range, and support measures exclusively for the vulnerable should be strengthened to expand their consumption capacities. In addition, policy efforts should be focused on resolving factors dampening consumer sentiment, including retirement anxieties and economic uncertainties, so that the propensity for consumption will not weaken excessively.

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