The South Korean economy can possibly face a prolonged recession similar to that being experienced by Japan back in the 1990s, forecasted a recent report.
The Korean economy has been observing the factors that had caused the prolonged economic recession in Japan including aging population, mounting household debts and dampened consumption among high-income earners, according to a researcher of the LG Economic Research Institute (LGERI) in the report titled ‘Japanese style-recession in the Korean economy’.
In most cases, the aged population tends to spend more than they earn and thus a higher proportion of aged population means higher propensity to consume. However, going against this conventional wisdom, the growth rate of consumption among those in their 50s, 60s and higher in Korea is hovering below the average growth rate among Koreans of all ages.
This is because the aged population nearing retirement lacks a retirement plan for their later ages as they struggle to handle education costs for their children. “The nation’s public and national pension systems are financially unstable, increasing the risks of uncertainty regarding pension entitlements,” noted the researcher.
What is more noteworthy is the weakened consumption among high-income earners. Those in higher income brackets have more capacities of additional spending but their spending is easily swayed by the fluctuations in economic activity.
High-income earners’ brisk spending encourages those in lower income brackets to spend more. When high-income earners cut back on their spending, it causes the overall consumption in all income brackets to shrink, ending up with more serious downturns of business cycles,” added the researcher.
[Written by Jieun Lee/edited by Soyoung Chung]
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