Consumer debts soar amid downturn

Household debts grow faster than income growth

The steep growth of consumer loans in the second quarter is raising concerns amid slowing economic growth.

Experts said that rising debt amid the slowdown could further dampen private spending and corporate investment causing a further delay in economic recovery.

According to the Bank of Korea (BOK), the outstanding balance of household debts grew by more than 15 trillion won from 1,451.9 trillion won in the first quarter to 1,467.3 trillion won in the second quarter. In the first quarter, the debt grew by 3 trillion won from the previous quarter.

The July figure saw a steep growth by 5.8 trillion won, which was greater than the 5 trillion won growth in May and 5.4 trillion won growth in June.

The private loans in the second quarter grew by 4.1 percent year-onyear.

This is greater than last year’s nominal GDP growth rate, which was 3 percent and also greater than last year’s growth rate of household income, which stood at 3.9 percent.

The growth in household loans is set to curb consumption as expenditures are cut to pay back loans. A fall in consumption is expected to result in a shrink in business’ production and investment, which will expected to lead to a decrease in jobs.

Yun Chang-hyun, a professor at the University of Seoul, said “Debts that increase in a recession raise considerable concerns as these are for survival purposes and may not be paid back.”

“The debt will also have an effect on bringing down consumption, which will create a vicious cycle,” he said.

The BOK forecasts consumption growth to fall to 2.3 percent this year, from 2.8 percent last year. This means the government will have to boost its spending to make up for the private-sector gap to achieve targeted GDP growth rates.

Private sector consumption grew by 0.7 percent in the second quarter from the previous quarter, whereas the government’s consumption grew by 2.5 percent in the same period.

This will put an additional strain on the economy, which is suffering from slow exports and investment. The effects of the trade feud with Japan are expected to weigh in, in addition to those of the ongoing trade war between the U.S. and China, on Korea’s export-reliant economy.

The government has lowered its growth forecast to 2.2 percent, but a number of global agencies forecast the growth rate will fall below 2 percent.

There are also concerns that the increasing debt situation will lead to a debt deflation, which refers to a combination of increasing debt and decreasing prices that results in an increased value of debt leading to financial distress.

“The increase in consumer loans is attributed to the self-employed getting loans for their businesses and livelihoods, showing worsening economic circumstances,” Yonsei University professor Sung Tae-yoon said.

“The government needs to make an effort to improve the situation,” he said.