An analysis has found that population decline and aging have a significant impact on slowing domestic consumption. Half of the consumption slowdown is due to the effects of population decline and aging.
In a report on Nov. 1, the Bank of Korea analyzed the trend growth rate of private consumption and found that the trend growth rate for 2013 to 2024 (2.0%) was 1.6 percentage points lower annually compared to the period from 2001 to 2012 (3.6%).
The Bank of Korea assessed that several structural factors, such as household debt and income polarization, have complex impacts on this trend slowdown in consumption, with rapid aging and population decline having a significant influence.
Due to demographic changes, the consumption growth rate slowed by an average of 0.8 percentage points per year between 2013 and 2024. This figure accounts for half of the 1.6 percentage points per year slowdown during the same period.
Demographic changes have affected the consumption downturn through two channels: long-term income conditions and propensity to consume. In terms of long-term income conditions, population decline and demographic shifts have reduced labor input, thereby lowering growth potential and slowing consumption by 0.6 percentage points annually.
In terms of average propensity to consume, increased savings due to longer life expectancy and age distribution changes centered around the elderly have lowered the overall economic propensity to consume, decreasing it by 0.2 percentage points annually.
Vice Administrator of the Bank of Korea's Research Bureau Structural Analysis Team, Park Dong-hyun, explained that "the slowdown in consumption growth rate due to long-term income conditions (-0.6 percentage points) is very similar to the impact on potential growth rate decline."
The Bank of Korea projected that from 2025 to 2030, when population decline and aging are expected to intensify, the slowdown in consumption growth rate due to demographic structure could widen to 1.0 percentage points annually.
Domestic demand indicators continue to show poor performance. According to Statistics Korea, the inflation-adjusted index of average retail sales from January to April this year decreased by 0.2% compared to the same period last year. Retail sales from January to April declined by 1.4% in 2023 during former President Yoon Suk-yeol’s term, following a 2.1% increase in 2022, marking the third consecutive year of decline last year (2.0%).
The Bank of Korea diagnosed that while economic measures are effective in addressing cyclical factors of consumption slowdown, structural reforms are the suitable solution for trend and structural factors causing the slowdown.
Vice Administrator Park Dong-hyun stated, "Structural reforms are the solution to consumption slowdown due to trend and structural factors," adding that providing conditions for the second baby boomer generation to work in permanent jobs for a longer period, rather than excessively entering self-employment post-retirement, can be an effective alternative.
Furthermore, he added, "actively utilizing the human capital of the second baby boomer generation will buffer the decline in growth potential due to reduced labor input and help alleviate the shrinking consumption due to old-age insecurity."