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Korea’s household savings increase twofold on weak economy

South Korea’s economy saw its household saving rate increase among the fastest in the Organization for Economic Cooperation and Development, according to the OECD.

The OECD forecast that Korea’s household saving rate is expected to increase more than twofold this year, compared to four years ago, from 3.9 percent in 2012 to 8.66 percent in 2016. This would rank Korea as the fifth highest in the OECD following Switzerland with 20.13 percent, Sweden with 16.45 percent; Luxembourg with 17.48 percent and Germany with 10.38 percent.

(123RF)
(123RF)

It also expects the country to maintain its household saving rate at 8.66 percent next year.

Korea’s rising household savings as the share of net disposable income come not because of increased wages, but mainly due to demographic changes as its population with purchasing power decreases amid an aging society.

“The household sector’s balance shifted from a deficit in 2011 to a surplus in 2012-2014, in part due to transitory demographic factors,” the OECD said in a report.

“Indeed, the household saving rate rose from less than 4 percent to 7.2 percent over that period, consistent with weak private consumption.”

Also, a growing number of people are saving their income as much as possible rather than spending them mainly for two reasons -- weak economic outlook and high household debt.

Korea’s household debt stood at 163 percent of household disposable income in 2014, well above the OECD average of 137 percent. Korea’s household debt in the 60 age group amounted to 73 percent of their financial assets, compared to 20 percent in the US, according to the OECD.

These negative factors could further put Korea’s economy into a vicious cycle of falling private consumption, demand, investment and wages, contrary to the general theory that high savings lead to an increase in corporate investment and income.

“The upward trend in household debt could further constrain private consumption,” the OECD said.

“The high elderly poverty rate reflects both the decline in family support and the weakness of other private and public sources of old-age income support,” it added.

The household saving rate is defined as the share of household net disposable income that is saved. Household net disposable income consists essentially of income from employment and from the operation of unincorporated enterprises, plus receipts of interest, dividends and social benefits minus payments of current taxes, interest and social contributions.

By Park Hyong-ki (hkp@heraldcorp.com)
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