Last year, retail sales contracted significantly, the largest drop since 2003, which was plagued by issues such as the 'credit card crisis' and 'mad cow disease.' The annual transaction level was similar to that during the peak of the COVID-19 pandemic in 2020. Last year is characterized by strong production and equipment investment, but a decline in consumption and construction.
◇ “High interest rates compounded by political situations” — decline in goods consumption for the third consecutive year
According to the '2024 Annual Industrial Activity Trends' released by the Statistics Korea on the 3rd, the retail sales index decreased by 2.2% compared to the previous year. Particularly, the downturn was pronounced in the second quarter last year (-2.9% compared to the same period the previous year), and the first (-2.1%) and fourth (-2.1%) quarters, as well as the third quarter (-1.9%), also showed unfavorable conditions.
The annual decrease was the largest since 2003, when it decreased by 3.6%. That year, the 'credit card crisis' led to a surge in those with poor credit, and household liabilities increased rapidly, making it a year when spending was particularly tight. Compounding this were additional issues like mad cow disease and avian influenza, leading to a sharp drop in consumables. This indicates that last year's decline in consumption was just as severe.
The retail sales index stood at 101.6. This index is the lowest and similar to that of 2020 (100) since then. The retail sales index reflects the actual transaction sales of businesses related to automobiles and retail, serving as a major indicator of the consumption situation. It indicates that retail sales were made at a level akin to the initial blow from COVID-19 in 2020.
The decline in retail sales is not just a temporary phenomenon. This marks the third year of decrease, making it the longest record of annual declines since statistics began. Not only did events like the 12.3 martial law situation at the end of last year and the Jeju Air incident dampen consumption, but also trending factors are at play.
A Ministry of Strategy and Finance official said, “Above all, interest rates have been high for the past three years, and wages have not increased significantly,” adding, “With disposable income falling in a situation where wages haven’t risen much, it likely influenced people to buy less.”
◇ The government assesses that “service industry production is holding up, consumption is not ‘bad’”
Sectors traditionally related to consumer indicators, such as wholesale and retail (-2.2%) and accommodation and food services (-1.7%), showed sluggish performances. However, growth was seen in other sectors like information and communications, transport and warehousing, and finance and insurance, marking a 1.4% increase in total service industry production last year.
The government is diagnosing that consumption is 'not bad' based on the increase in total service industry production. A Ministry of Strategy and Finance official noted, “Retail sales and overall service industry production account for roughly 40% and 60% of consumption, respectively,” stating that “the remaining service sectors, including information and communications, finance, real estate, and transport and warehousing, should also be viewed as related to consumption. This aligns with the 1.1% growth in private consumption from the gross domestic product (GDP) announced by the Bank of Korea and the direction shown by (industrial activity trends).”
This official remarked, “While the situation in the service sector is relatively better for consumption, goods sales are not keeping pace,” explaining, “This trend post-COVID is not only seen in our country but also globally.”
◇ Consumption and construction 'sluggish,' while production and equipment investment showed 'good performance' in 2024
Last year, both retail sales and construction performance were poor. Constant value of construction completion decreased by 4.9% compared to the previous year, marking the largest decline since 2021 (-6.7%) and a 'negative' transition after three years. While civil engineering saw a growth of 1.8%, the construction performance fell due to a 6.9% decline in building construction. This construction sluggishness is expected to continue until the first half of this year. However, given the recent strong construction orders, the government anticipates that positive construction figures may appear from the second half of the year.
In contrast, overall industrial production and equipment investment performed well. Last year, the overall industrial production index rose by 1.7% compared to the previous year, while equipment investment increased by 4.1%. This is attributed to strong performance in the semiconductor sector. The manufacturing and mining production that includes semiconductors showed a favorable trend, and investment in machinery such as semiconductor manufacturing equipment also rose. The average manufacturing operation rate was 72.9%, up 1 percentage point from the previous year.
The government expects a continued positive trend in production this year and anticipates a rebound in consumption. A Ministry of Strategy and Finance official stated, “Since the demand for high-performance semiconductors remains strong, exports, which impact production, are expected to maintain a good level in the first half of the year,” and added, “Given the pattern of real wages increasing, domestic demand is also likely to improve with some lag.” However, they also noted the need to monitor the situation as the impact of tariffs due to the inauguration of the new Donald Trump administration has not yet been reflected in these forecasts.