Spending splurge: Korean households spend more than what they earn

Koreans have been overspending: In the face of inflation and external uncertainties, one would have expected Korea's consumption to slow down - yet retail sales have continued to grow at a rather resilient pace. Korea's household expenditure has been rising faster than income for eight quarters.

Real income growth is negative and household debt is rising: Korean households have already seen two consecutive quarters of contraction in real income growth. Inflation is eating into their purchasing power. Coincidentally, credit card usage is rising and the number of credit cards per person is now at a record high - higher than during the credit card crisis. We cannot help but wonder if Korean consumers are resorting to using credit in order to maintain their overspending during negative real income growth.

Lacking the means to consume more: Income growth is likely to be stable at best in the coming quarters. Capex growth has been disappointing recently, which points to slower employment growth ahead. Wealth effect from the stock market is volatile, while that from property is still rather sluggish, especially in the Seoul area.

There is less left for consumption to increase when non-consumption expenditures are going up while upside in income is missing. The government is concerned about household debt and we think administrative tightening will continue to restrain further credit expansion. Consumers may not be able to rely on credit to consume, even if they want to, and they do not have much savings to tap into.

We do not think this is a crisis, but Korea's consumption needs to go through some adjustment - or at least it cannot rise more in the coming quarters. Since they have been overspending, there will not be pent-up demand to drive strong consumption growth even if the macro environment improves.