BOK report: 'Review of conditions for private consumption recovery'
Large semiconductor dividends to contribute to spending from Q4
10% won strengthening raises household purchasing power by 0.35%
Household debt, stock market correction seen as constraints
Large performance bonuses and dividends driven by the semiconductor boom are expected to lift private consumption next year, while the recent decline in the won-dollar exchange rate is also forecast to boost real purchasing power and stimulate spending.
The Bank of Korea said in its report "Review of Conditions for Private Consumption Recovery" that an analysis of factors including income, fiscal policy and the exchange rate pointed to a gradual broadening of the private consumption recovery. "As we move into next year, the positive spillover effects of the semiconductor boom will spread, and the pace of private consumption recovery will gradually expand," the report said.
The report estimated that special performance bonuses at major companies in semiconductors, automobiles and shipbuilding could reach 60 trillion to 70 trillion won ($52.8 billion), projecting a significant rise in household spending from early next year. The analysis assumed that a temporary income increase of 1 million won would translate into roughly 110,000 won in additional consumption.
Large dividend payouts from chipmakers are also expected to contribute to household spending growth from the fourth quarter onward. The report noted that as stock ownership has become more widespread in recent years, the consumption-boosting effect of dividends could be broader than in the past.
The Bank of Korea also projected that higher corporate tax revenues would lead to increased government transfer payments to households, expanding their capacity to spend. Transfer payments refer to funds or goods the government provides unilaterally without receiving anything in return. A significant portion of the increase in such payments is expected to go toward supporting low- and middle-income households, which tend to have a higher marginal propensity to consume — the share of additional income spent rather than saved.
The central bank estimated that a 10 percent strengthening of the won against the dollar would improve households' real purchasing power by about 0.35 percent, and went on to say that a stronger won would lower import prices and raise purchasing power across households broadly.
"Performance bonuses and dividends will primarily boost the spending capacity of high-income households, but expanded government transfer payments and a stronger won will significantly raise purchasing power for low- and middle-income households," the Bank of Korea said. It added that while some of the income gains could flow into real estate, "most will accumulate as financial savings."
However, the report flagged rising household debt, a slowdown in residential construction and a stock market correction as factors that could constrain the private consumption recovery.
On the stock market correction in particular, the report warned that if expectations for a share price rebound weaken or if sentiment among loss-making households is slow to recover, spending constraints could persist for some time.
Bank of Korea Governor Shin Hyun-song, speaking at a monetary policy press conference Thursday morning, said the recent sharp correction in share prices was having an impact on the real economy. He added that "over the long term, income conditions continue to improve through exports and investment, and from a broader perspective, consumption is on a fairly solid trajectory."
kimstar@heraldcorp.com
