ⓒ YONHAP News

Korea’s consumer confidence is showing signs of recovery from the COVID-19 recession. The long holiday early this month, disaster relief funds to be provided to all households in the nation and the government’s plan for a third extra budget are bringing hopes of business revival. Here is economic commentator Chung Chul-jin to examine the emerging signs of upward turns in domestic consumption.

From mid-April, the number of COVID-19 cases started to decrease significantly in Korea. While social distancing rules are still in place, more and more people are going out, ready to start spending again. Sales of major department stores plummeted in March, by 38 percent in the worst case, compared to the same month of last year. But from April 1 through 20, sales decreased only 5 to 6 percent year-on-year, indicating that the pace of decline slowed considerably.

For the long holiday period from late April to early May, reservations for resort areas across the nation have risen to 80 percent on average. The seemingly quick return to normal raises hopes for recovery in domestic consumption.

Koreans enjoy the so-called “golden holiday,” which started with Buddha’s birthday on April 30 and includes Labor Day on May 1, Children’s Day on May 5 and a weekend in between. For the extended holiday period, reservations for flights and accommodations have increased sharply. Gimpo International Airport is filled with travelers again, and nearly 180-thousand tourists are expected to visit the southern resort island of Jeju during the holiday period.

Obviously, the pent-up demand is exploding. In a similar vein, a phrase “retaliatory consumption” has emerged in China.

People may refrain from consumption in times of difficulty. But when the situation improves, they tend to spend as much as they have saved to give themselves a well-deserved reward. The phenomenon is referred to as compensatory consumption or deferred consumption, which is called “retaliatory consumption” in China.

For instance, a luxury brand store in Guangzhou has racked in 2.7 million US dollars of sales in just one day. Also, 288 apartments in Guangdong Province sold out in seven minutes, while 14 super expensive townhouses priced at about 6.6 million dollars each sold out in eight seconds. Many hope that the compensatory consumption in China will lead to recovery in spending in other parts of the world.

In China, the COVID-19 outbreak began to abate quickly in March. As a result, lockdown measures have been eased and many restaurants and stores have resumed their business. Some industries are seeing an increase in consumption that was suppressed during the lockdown period in January and February. But it doesn’t mean that consumption has entered an upward trend. The Chinese economy has ground to a halt due to the COVID-19 epidemic, leading to a drastic decline in household income. As a result, many Chinese are still reluctant to spend.

Korea faces a similar situation. Domestic consumption is seeing a much-awaited momentum for recovery, but consumer sentiment still remains frozen.

According to the Bank of Korea, the country’s composite consumer sentiment index was 70.8 in April. A reading below 100 means most have negative views on the economy. The index dropped to 67.7 in December 2008 in the aftermath of the global financial crisis. Now, Korean consumers are nearly as pessimistic about the economy as they were 12 years ago. We’ve talked about some positive signs such as compensatory consumption. But it is still too early to say that consumer sentiment will take a turn for the better.

Amid the prolonged COVID-19 pandemic, consumer sentiment in Korea has fallen to the level of the 2008 global financial crisis. Similar results were found in sub-indexes measuring consumers’ sentiment toward their own economic conditions, spending, employment opportunities and income levels in the future.

As part of efforts to ease public jitters over the economic impact of the virus outbreak, the government will provide relief funds to all citizens.

Much like whipping a running horse, the emergency relief funds are expected to play a pump-priming role for domestic spending. Initially, the government decided to give relief handouts to people in the bottom 70 percent of the income bracket. But the scope of recipients has been expanded to every household. If the money is spent in the market in the short term, like June and July, it is estimated to add a maximum of 0.36 percentage point to growth. It is also expected to help cushion the economic fallout from the COVID-19 pandemic to some extent in the second quarter, which will be the hardest-hit period.

The National Assembly budget office estimated that the government’s original budget proposal of 7.6 trillion won or about 7 billion US dollars will raise this year’s growth by up to 0.114 percentage point. But the National Assembly has passed the second supplementary budget bill worth 12.2 trillion won or about 10 billion dollars to give emergency funds to all households nationwide. If the large amount of money is released into the market in a short period, it is forecast to lift Korea’s growth rate this year by somewhere between 0.1 and 0.36 percentage point.

The Gyeonggi Province has already distributed its own basic disaster income of 100-thousand won or 90 dollars to every resident in the province, where self-employed storeowners have seen their sales increase 56 percent from the previous month since the relief measure.

However, the government believes the second extra budget will not be enough to support an economic recovery. On April 28, President Moon Jae-in described the ongoing COVID-19 crisis as an “economic war situation” and raised the need for another extra budget bill.

The third supplementary budget bill will be focused on employment. Part of the third extra budget or 9 billion dollars will be spent in maintaining the jobs of certain groups of employees including freelancers. Separately, the government will establish a 32 billion-dollar fund by issuing government bonds to help seven key industries keep their workers employed.

The first extra budget was mostly about assisting small business operators, while the second one was drawn up to provide disaster relief funds to people. And the third one has the purpose of stabilizing employment. The third extra budget bill should get parliamentary approval in June or July for a swift budget execution.

To cope with the unprecedented economic impact of the COVID-19 epidemic, the government has allocated three extra budgets in a year. The combined amount of over 50 trillion won or about 45 billion dollars is expected to surpass the record-high extra budget in 2009.

Korea reported no infections from the April 15 general elections, despite the high voter turnout. In a similar way, the public is advised to strictly follow precautionary measures over the long holiday period in early May. After that, the second and third extra budgets should be executed properly to contribute to reviving the sluggish domestic consumption.