South Korean Households are Spending Less and Less

The Bank of Korea announced on September 19 that South Korean deposit money banks recorded a turnover of demand deposits of 20.3 times in July this year. This number is two less than in the previous month and a 137-month low. It used to be as high as 34.8 in 2010 but fell to 34.2 in 2011, 32.7 in 2012, 28.9 in 2013, 26.7 in 2014 and 24.3 last year.

Such a downward movement implies that South Korean consumers are pinching pennies. In the second quarter of this year, their average propensity to consume hit an all-time low of 70.9%. This is resulting in slowdown in production and investment on the part of enterprises. Their capital expenditure decreased 4.5% and 2.7% year on year in the first and second quarters of this year, respectively.

Bank loans are flowing mainly to self-employed businesses and asset markets such as real estate and leasing rather than the manufacturing sector, too. In the second quarter, the amount of the loans local deposit-taking institutions provided for manufacturers edged up by 3.7% from a year ago while the amount of total business loans increased by 6.5%. During the same period, the amounts increased by as much as 15.7%, 10.8% and 7.2% for real estate and leasing, lodging and food services and wholesale and retail services, respectively.

Likewise, the velocity of money reached a record low of 0.71 in the first quarter and the money multiplier hit a record low of 16.9 in April this year. With the circulation of money coming to a halt as mentioned above, key interest rate cut is losing its effect as well. The Bank of Korea said in its report last month that financial conditions improved based on a key rate cut had no significant positive effect on the domestic real economy other than asset markets.