Korea’s household debt likely to drag down economic growth

  • A recent study by the National Bureau of Economic Research (NBER) emphasised the concern of South Korea’s low economic growth attributed to its escalating household debt, which has seen one of the largest increases in debt-to-GDP ratio globally over the past seven years.
  • The study highlighted Korea’s particularly elevated debt service ratio, underscoring the risk of pulling the economy into a phase of subdued growth. A surge in the household debt service ratio could lead to a considerable negative impact on real GDP growth. The potential transmission of higher interest rates into reduced household spending stands as a critical variable for evaluating Korea’s future GDP growth prospects.
  • Comparatively, while the global debt service ratio has seen a slight decrease of 0.2 percentage points since 2015, Korea’s debt service ratio has witnessed a noteworthy increase of over 2 percentage points within the same period, signifying a distinct divergence. This trend raises concerns that consumer spending might experience weakness in the country in the upcoming years, a consequence of the abrupt and substantial surge in interest rates during 2022.
  • Despite these challenges, the study offered a relatively optimistic assessment of Korea’s resilience against a severe financial crisis, primarily due to its robust current account position. He noted that countries experiencing substantial spikes in household debt alongside a current account surplus tend to witness a decline in growth, albeit less severe compared to nations running current account deficits. This unique strength in Korea’s external balance provides a certain degree of insulation against the most dire financial consequences.

External Link : https://www.koreatimes.co.kr/www/biz/2023/08/488_356145.html