Korea’s savings rate has reached the highest level in almost 20 years amid fears that consumption is drying up even further.
Less private spending means slower production of goods and a decline in new hires.
Korea’s savings rate in the first quarter of this year reached 36.9 percent, the highest since 37.2 percent in the third quarter of 1998, at the height of the Asian financial crisis.
In the first quarter of 1998, the rate soared to 40.6 percent as banks paid up to 17.71 percent interest. But now banks pay at best 1.45 percent and buoyant exports point to a gradual emergence from the slump.
The savings rate has been growing every year. From 2011 to 2014, it hovered in the 34-percent range, but rose to 36.4 percent in 2015 and remained there since.
Private consumption rose only 0.6 percent in the third quarter of 2016, 0.2 percent in the fourth quarter and 0.4 percent this first quarter.
Experts have several explanations. First, a rapidly aging population has prompted many households to cut back on spending and put more money away in their bank accounts for retirement.
Businesses also tend to cut back on facilities investments and stash their money away as they find no new growth engines amid economic uncertainties.
Sung Tae-yoon at Yonsei University said, “As private spending and corporate investments drop, the savings rate rises, leading to weakened economic vitality”.
Also, household debt of nearly W130 trillion can mean that any incremental rise in wages goes straight into interest payments rather than spending on goods and services (US$1=W1,125).