Release of medium-to-long term outlook on respective agenda based
on the analysis of pending macroeconomic issues

KDI Review of the North Korean Economy

KDI Economic Outlook 2018-2nd Half

Fluctuations in the Consumption of Foreigners in Korea and the Implications

SUMMARY ■ Domestic consumption by foreigners tumbled in 2017, partly amplifying the fluctuations in domestic consumption and having a negative impact on consumption-related sectors e.g. services in Korea.

■ Chinese tourists are behind the current sluggishness of domestic consumption, implying that the Chinese economy has a considerable impact on not only traditional export and import sectors but also the consumption-related industries in Korea.

■ The policy focus should be placed on securing flexible FX rates to reduce fluctuations in domestic consumption in the short-term while strengthening the competitiveness of the service sector in the long-term.
Report VOD
The gap between private consumption and domestic consumption is growing.

So, what is the difference between the two?

Private consumption is the total spending of the residents of a country both at home and abroad.

And domestic consumption is the total spending of both residents and foreigners within the same domestic territory.

In Korea, domestic consumption by foreigners is more closely associated with production by consumption-related industries
than the overseas private consumption by residents.

Despite the relatively rapid recovery in private consumption, production by consumption-related industries recovered less in 2017, implying a relatively weaker correlation between the two.

This is mostly due to the decline in total domestic consumption
as foreigners tightened their purse strings.

So, how significant is the domestic consumption by foreigners in Korea?

KDI analyzed the impact of domestic consumption by foreigners
on consumption-related industries.

It was found that although the share of domestic consumption by foreigners in total domestic consumption is small,
its contribution to the volatility of domestic consumption
has grown over the years.

On a one point increase in the standard deviation of domestic consumption by foreigners, the value-added in the services and
food and accomodations industries and the growth rate in services consumption would all increase.

This has been particularly stronger in recent times.

During the global financial crisis, the shocks delivered to Korea’s domestic consumption were eased as domestic consumption by foreigners increased, offsetting the huge slump in that of the residents.

In 2017, however, foreigners spent 28% less than the previous year,
slashing the growth in total domestic consumption by 25%.

So, why did the spending of foreigners in Korea take a downward turn?

The domestic consumption by foreigners is closely tied to the foreign exchange rate. Therefore, any movements in the rate will
typically be reflected in the spending.

In 2017, however, factors other than the exchange rate were
primarily responsible for the decline.

To delve further, an examination was conducted into the number of tourists that visited Korea in 2017.

It was found that due to geopolitical issues, including the relocation of Thaad, Chinese tourists, who make up half of all tourists in Korea, fell by a record-breaking 55% compared to the previous year.

And as a result, the total number of foreign tourists dropped by a quarter.

The number of Chinese tourists still has not recovered to past figures, and it is weighing down on the recovery of
production by consumption-related industries.

It is expected that this trend will continue, with domestic consumption being affected by the rebound in the number of visitors to Korea, especially those from China.

[Interview with the author]
Korea’s total domestic consumption stalled in 2017 due to the significant fall in the expenditure of foreigners, especially those of Chinese tourists whose numbers dropped by over half.
This implies that together with the traditional export industry, China will also have a big impact on consumption-related industries.

In order to prepare for future economic contractions, efforts must be made to secure the flexibility of the FX rate to ease the fluctuations in domestic consumption. Also, consumption-related industries such as services must enhance their competitiveness to meet the demands from their possible growing exposure to external markets.
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