S. Korean economy dragged down by weak domestic demand: KDI

Weak domestic consumption has hindered South Korean economic recovery despite solid exports, a state-run think tank said Monday.

“Despite strong export growth, the Korean economy is showing signs of constrained improvement, as elevated interest rates are delaying the recovery of domestic demand,” the Korea Development Institute (KDI) said in a monthly economic assessment report.

The KDI has pointed to weak domestic demand since late last year.

In August, exports rose 11.4 percent on-year to US$57.9 billion, the 11th straight monthly gain, as semiconductor sales jumped 38.8 percent to $11.9 billion, or the highest volume for any August ever, according to government data.

But retail sales, a gauge of private spending, fell 1.9 percent on-month in July, due mainly to weak demand for automobiles, gasoline and semidurables.

Compared with a year earlier, retail sales lost 2.1 percent.

“Retail sales remained subdued amid the persistent high interest rate environment. Construction investment and related employment may remain suppressed for the time being, given the prolonged decline in its leading indicators, potentially constraining the recovery of domestic demand,” the report read.

The Bank of Korea (BOK) kept interest rates unchanged at 3.5 percent, the highest level in about 16 years, in August, and Gov. Rhee Chang-yong said the decision was made in consideration of rising home prices and surging household debts despite sagging domestic demand.

Service consumption also remained weak due primarily to accommodation and food services, which was also affected by the recent payment delays of major e-commerce platforms TMON and WeMakePrice, the think tank said.

The KDI also pointed to the increasing delinquency rate among individual business owners as a negative factor.

As for the global economy, the think tank pointed to high interest rates, ongoing geopolitical tensions and weaknesses in the manufacturing sector of key economies as major downside risks despite moderate growth.