Warning by BOK
According to an August 12 report by The Bank of Korea (BOK), since the Korean economy is unable to balance household debts, it is mired in a swamp of stagnant growth, where any opportunity for economic growth is lost. It indicates that, due to debt repayment, consumption and spending are low, which leads to economic paralysis, negatively affecting business investment and job creation.
It was reported that the recent improvements in Korean household balance sheets are only an illusion stemming from subdued consumer spending.
The BOK report, which analyzes the economic behavior of households in debt, showed that household balance sheets were improved significantly last year. Korea's household debt-to-income ratio rose 18.9% in 2011 and 21.1% in 2012, after falling 19.8% in 2008 and 18.5% in 2010. The proportion of families with debt stood at 23.8% in 2012, down from 26.1% between 2003 and 2011.
But the seemingly rosy data means that households chose to pay back debt instead of spending their earnings. In other words, people tightened their belts as a result of debt pressure. In fact, the average propensity to consume, or the average percentage of consumption to disposable income, was 0.74 in 2012, lower than 0.77 in the 2003-2011 period. The corresponding figure for families in debt was down to 1.32 from 1.36. The household debt-to-service ratio, in contrast, rose nearly 30% in 2012 from below the 20-percent level in 2003.
The report showed that 80% of families headed by individuals age 60 or older that have debt are concentrated in the low-income bracket, thus calling for some measure to improve their earnings. Older households with debt were reported to spend more money on healthcare, transportation, housing, water, electricity, heating, hospitalization, car purchases, and maintenance compared to those without debt.
A BOK official said, "The proportion of households led by someone aged 60 or older makes up the highest percentage of the total Korean population. But the rate of their income increase is low, and income disparities are widening," adding, "Without higher earnings, a decline in consumer spending is inevitable."