2020 saw a sharp contraction in household consumption.
The snowballing number of Covid-19 cases prompted the government to enforce strict measures that limit daily activities.
Inevitably, the in-person consumption of, for example, clothing and travel, and eating out dipped as the non-face-to-face consumption of food and durable goods, like furniture and home appliances, grew.
An examination of household spending during the past ten years reveals that,
while there have been changes in the amount spent on in-person and non-face-to-face consumption, the ratio has generally remained consistent — that is, until the pandemic.
Typically in times of economic crisis, households opt to tighten their purse strings, and delay the purchase of durable goods to prepare for any future uncertainties.
Then, why was the situation so different in 2020?
To answer this question, we must first explore the changes in the composition of consumption.
Despite the fall in market income, which includes earned and property income, disposable income ticked up thanks to government support packages like the Emergency Disaster Relief Fund.
By income quintile, market income dropped by a significant margin in the first quintile while consumption expenditure increased as disposable income grew. This clearly shows that government support contributed to easing the harsh conditions for households.
On the other hand, the growth in disposable income fell short of the growth in market income for the third quintile, making the group more sensitive to the recession, which, in turn, curbed their spending, and encouraged them to save.
A comparative analysis of the share of consumption by item, under the assumption that the total expenditure in a non-pandemic situation and the actual expenditure are the same, shows that in-person spending fell for all households.
However, the same cannot be said about non-face-to-face consumption.
In terms of durable goods, households in the third quintile tightened their spending while those in the fifth quintile increased it, especially on cars.
As for the remaining quintiles, spending increased in durable goods, such as furniture and home appliances, And all households increased their spending in non-durable goods, such as food.
This shows that, although the risks posed by Covid-19 have limited social activity and in-person spending, the growth in disposable income has enabled consumers to increase their non-face-to-face consumption.
Given the assumption that Covid-19 shock decreases the daily activities and preference for in-person consumption, a dynamic macromeconomic model is used to examine the quantitative changes in household consumption over time due to the Covid-19 shock.
By similar margins to the shifts in household consumption in 2020, the model shows that both total and in-person consumption fall and that non-face-to-face consumption rises, indicating that the Covid-19 shock is the key determinant of the changes.
Moreover, the consumption shock would have been much more profound if the real interest rate had not been lowered, and the growth in non-face-to-face consumption would not have been as notable.
Ultimately, the recovery in household consumption will depend on when the shock of the pandemic begins to wane.
An analysis was conduced based on three scenarios - the first, or baseline scenario, assumes that the shock will ease to one-third of the level at the end of 2020 in December 2021, the second, or upside scenario, assumes that it will happen a quarter earlier than the baseline, and the third, or downside scenario, assumes that it will happen two quarters later than the baseline.
According to the findings, compared to the baseline scenario, total household consumption will grow 0.5%p more in the upside scenario, and shrink by 0.6%p in the downside scenario.
As for non-face-to-face consumption, conditions normalize at the fastest rate in the second scenario.
The tight restrictions Covid-19 has imposed on our daily activities have been so significant that the composition of our consumption has changed. But, until there is certainty that the pandemic is behind us, a recovery in household consumption is difficult to expect. For that reason, the expansionary monetary policies that have been put into place to ease the downturn in consumption will have to remain for the time being.
Additionally, considering that below middle-income groups would have been hit hardest by the economic shock, and the spending capacity of low-income households, efforts must be made to focus government support on this population. At the same time, to enhance the public’s acceptance of the government’s prevention and control policies, support must also be given to small businesses as they have been the most impacted by the social distancing measures.
■ Restrictions on social activities and avoidance of in-person consumption due to Covid-19 drove down overall household consumption but increased in non-face-to-face consumption.
○ In 2020, households significantly reduced in-person consumption due to infection concerns and social distancing but expanded non-face-to-face consumption at a relatively fast pace to make up for the decrease in in-person consumption.
╺ In particular, non-face-to-face consumption of items such as automobiles surged,mainly among high-income households with relatively higher spending capacity.
╺ On the other hand, middle-income households who have had the lowest disposable income growth appear to have spent less on durable goods and more on precautionary savings as they are being hit hardest by the pandemic.
○ Considering that the recent changes in household consumption were mainly due to Covid-19, a rapid recovery will come particularly from face-to-face consumption as the Covid-19 shock eases.
╺ However, the growth in non-face-to-face consumption will likely slow if the consumption composition normalizes before Covid-19 and the base effect are reflected.
■ Considering that household consumption will probably remain sluggish until herd immunity has been achieved, the government needs to maintain accommodative its macroeconomic policies.
○ The spread of Covid-19, a major cause of the recent sluggish household consumption, needs to be suppressed as strongly as possible through rapid
vaccine rollouts and continued quarantine measures.
○ Since the low interest rate is cushioning the contraction in consumption, the economy must be supported (incl. household consumption) by maintaining the accommodative stance in monetary policy for the time being.
○ In addition, financial support should be considered within a reasonable range and level so that a decrease in households’ market income resulting from social distancing, etc. will not lead to a further contraction in consumption.
╺ Considering that the consumption shock from Covid-19 was most pronounced among the middle-income households, it is necessary to take into account not only the income level of each income class but also the size of shock to their income when selecting the targets of government support.
╺ In addition, since effective quarantine is key to a recovery of household consumption, simultaneous support to those heavily burdened with social costs stemming from social distancing measures needs to be provided in order to secure the acceptance and sustainability of quarantine policies.
Providing Economic Forecast and Macroeconomic Policy Direction, the Groundwork for a Brighter Future
The Department of Macroeconomics is conducting researches on the macro economy and macroeconomic policy, particularly focusing on suggesting the analysis of macroeconomic trends and current status of the economy at home and abroad, the economic forecast, and the policy direction of the macro economy. The Department is also in charge of establishing, sustaining and maintaining various econometric models, based on which it analyses policy effects and develops a long-term economic forecast.
Economic trend analysis, short- and long-term forecast
Policy study on macroeconomic management
Basic structural analysis on macroeconomic areas
Maintenance of multi-sectoral dynamic macroeconomic model
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