From Clothing to Transport: Where Koreans Cut Back Most

South Korea's economy is sending troubling signals as middle-aged households, a vital backbone of the nation's economic activity, face unprecedented financial strain. The third quarter of 2024 saw a historic decline in business income for households led by those in their 40s, a demographic traditionally considered economically stable and robust.

According to Statistics Korea’s latest report, the average household income rose by 4.4% year-on-year to 5.26 million KRW. However, a deeper analysis reveals a glaring disparity: the business income of households headed by 40-something earners plummeted by more than 13% compared to the previous year. This represents the steepest decline since such data collection began in 2006.

The dramatic drop in business income among 40s household heads underscores the challenges faced by self-employed workers, particularly those in the retail and wholesale sectors. These sectors, which account for a significant portion of 40-something self-employment, have been hit hard by weak domestic demand and prolonged consumer conservatism.

“People simply aren’t spending,” explained an industry analyst. “The retail and wholesale sectors rely heavily on discretionary purchases, and with wallets tightening, the impact is most pronounced on small businesses operated by middle-aged households.”

Adding to the strain is the dual burden many 40s households face: financing children’s education while providing support for aging parents. This demographic’s economic vulnerability has wide-reaching implications for both family stability and national economic performance.

The decline in business income is closely tied to sluggish domestic demand, which continues to show little sign of recovery. South Korea’s retail sales index has been falling for 10 consecutive quarters, marking the longest period of contraction in recorded history. Spending on non-essential goods has been particularly impacted, with clothing and footwear expenditures hitting a record low of just 3.9% of total household spending.

Notably, lower-income households have been forced to tighten their belts further, with spending on clothing and footwear falling by over 13% year-on-year. Meanwhile, higher-income households, though experiencing growth in earnings, have demonstrated less propensity to increase their spending, further compounding the issue of weak demand.

• The table outlines key categories of household spending in South Korea that experienced a decline in Q3 2024. It highlights both the average monthly spending (in KRW) and the percentage change from the previous year, emphasizing areas where consumption has contracted the most.

South Korea’s overall consumption propensity dropped to 69.4%, a 1.3 percentage-point decrease compared to the previous year. This decline reflects a concerning cycle where weak income growth suppresses spending, which in turn exacerbates economic stagnation.

“Domestic consumption is a key driver of GDP growth,” noted a senior economist. “When spending shrinks across key demographics, especially middle-aged households, the entire economy feels the ripple effects.”

Looking forward, there is cautious optimism that consumption may rebound slightly in 2025, bolstered by easing inflation and potential interest rate cuts. However, significant risks remain. The depreciating won and global supply chain disruptions could keep import costs high, further straining household budgets. Additionally, rising prices for staple goods, including coffee and olive oil, could erode any gains in disposable income.

To address these challenges, policymakers are being urged to implement targeted fiscal measures aimed at revitalizing domestic demand. These could include support programs for self-employed workers in struggling sectors and initiatives to stimulate consumer confidence. Expanding income growth opportunities across all socioeconomic strata is equally critical to breaking the cycle of weak demand.

The steep decline in business income for 40-something households is more than an economic statistic; it’s a call to action. As these households grapple with financial uncertainty, their struggles highlight the urgent need for comprehensive policy interventions to revive domestic demand and support the segments of the population that form the backbone of the economy. Without swift action, the economic challenges facing middle-aged households could ripple outwards, threatening the broader stability of South Korea’s economy.