[Sejong = E-Daily Reporter Park Sun-Yeop ] While semiconductor exports are booming, household consumption remains sluggish, and the sharp drop in stock prices has emerged as a burden on the recovery of domestic demand.

This is because when stock values fall, more households may tighten their purse strings, even if their immediate income does not decrease. Concerns are mounting that if asset losses compound a situation where export earnings are not fully translating into household income and consumption, the gap between export and domestic demand could widen further.

◇Retail Sales Decline for Two Consecutive Months… Stock Market Plunge Likely to Tighten Household Spending Even Further

According to the Korea Exchange on the 26th, the KOSPI closed at 5,469.47, down 80.83 points (1.46%) from the previous trading day. This represents a 21.9% drop from the level on the 2nd (7,003.74). Compared to the all-time high closing price (9,114.55) recorded on June 22, it has fallen by 40.0%. Stock prices of leading semiconductor companies, such as Samsung Electronics and SK Hynix, also fell sharply.

The problem is that domestic consumption had already been sluggish even before the stock market’s sharp decline. According to the National Data Agency, retail sales in August fell 1.8% from the previous month. This marks the second consecutive month of decline, following July’s drop of 2.6%. Sales of durable goods, such as passenger cars and home appliances (-4.5%), and non-durable goods, such as food and beverages (-1.6%), both declined. Sales at department stores (-6.4%) and large supermarkets (-5.9%) also fell.

In its “October Economic Trends” report released on the 12th, the Korea Development Institute (KDI) noted that while exports and capital investment—led by semiconductors—are performing well, the recovery in consumption remains modest because the positive economic effects have not spread to households as a whole. The analysis suggests that inflationary pressures caused by high oil prices and weak wage growth are constraining the recovery of household purchasing power.

In this situation, stock market losses could serve as an additional factor making it difficult for households to increase spending. In its revised economic outlook released last August, the KDI warned that if high volatility in the stock market persists, leading to a contraction in household consumer sentiment and a slowdown in financial services consumption, the improvement in private consumption could be constrained. This is why there are concerns that if the recent sharp decline in the stock market continues for an extended period, the pace of consumption recovery could slow even further.

◇“The Warmth from Exports Must Trickle Down to Household Incomes”

There have been instances in the past where retail sales declined in tandem with sharp drops in the domestic stock market. In October 2008, during the global financial crisis, the KOSPI fell 23.1% over the course of a month, and sales of consumer goods also decreased by 1.4% compared to the previous month.

In September 2022, when stock markets plummeted due to monetary tightening by major economies, the KOSPI fell 12.8%, and retail sales dropped 1.8% from the previous month. The slump continued in October, with retail sales declining by 0.2%.

Overseas, research has also been published estimating the impact of sharp stock price declines on consumption. In a report titled “Downside Risk to the Stock Market and Consumption” released last September, researchers at the Federal Reserve Bank of Atlanta analyzed changes in U.S. household consumption based on the magnitude of stock price declines.

The researchers estimated that if the S&P 500 index were to fall by 25%, the annual real consumption growth rate in the U.S. could drop to -0.25%, which is 3.0 percentage points lower than the historical average (2.75%). The findings showed that if the stock market decline were to widen to 35% or 50%, the consumption growth rate would fall by 3.86 percentage points and 5.14 percentage points, respectively. Although this is a hypothetical scenario reflecting the asset structure of U.S. households, it demonstrates that a sharp stock market decline could deal a significant blow to consumption.

Experts point out that for consumption to recover steadily, not only must stock market conditions improve, but households’ actual earned income must also increase. They argue that strong earnings from export-oriented companies must translate not only into performance bonuses and dividends but also into increased work opportunities for suppliers, as well as higher employment and wages.

Kim Dae-jong, a professor in the Department of Business Administration at Sejong University, said, “If the KOSPI falls by more than 20% in a short period, household asset values will decline and consumer sentiment may be dampened.” He added, “Even if exports increase due to the semiconductor boom, prolonged stock market volatility could weaken the wealth effect and slow the pace of consumption recovery.”

While there are expectations for a recovery in consumption next year, stock market volatility remains a wildcard. In its report titled “Assessment of Conditions for Future Private Consumption Recovery,” released on the 22nd, the Bank of Korea projected that increased performance bonuses and dividends driven by the semiconductor boom, along with government support for households, would underpin the recovery in consumption. At the same time, it identified several risk factors that could constrain future consumption growth, including further stock price corrections, weakening expectations for a stock market rebound, and delays in the recovery of consumer sentiment among households that have suffered stock investment losses.