Last year, there has been growing interest in the background of different interpretations regarding the consumption in South Korea made by the government and the Korea Development Institute (KDI), a national policy research organization. The Ministry of Strategy and Finance assessed that "consumption was not bad," while KDI stated that "the downturn continued."
The reason for the differing evaluations between the two institutions is that the government referenced "production of services" more actively as a consumption indicator compared to KDI. This controversy fundamentally arose due to the lack of a monthly indicator that accurately measures "what consumption is" as the structure of industries has changed with the times. The Statistics Korea is developing complementary indicators, but it is likely to take time before they are practically utilized.
◇ The optimistic background of government consumption is the robust 'service production'
According to the government on the 24th, the Ministry of Strategy and Finance noted that judging the annual industrial activity trend results, which showed the worst retail sales record since 2003 (a 2.2% decrease), as a decline in consumption is incorrect, stating, "We should look at not only retail sales, which represent product consumption, but also the consumption of services. The performance in service production (a 1.4% increase) was good."
In contrast, KDI has continuously evaluated this as "consumption recession." In its recently published "Economic Trends" on the 10th, KDI stated, "The decline in retail sales has expanded across most categories, illustrating a prolonged recession in product consumption," adding that "service consumption also showed a weak trend, with the decline expanding in major sectors." KDI has diagnosed that consumption has been sluggish throughout last year due to the effects of high interest rates. A KDI official remarked, "The government's view seems somewhat different from ours."
Industrial activity indicators representing the current state of the South Korean economy are largely divided into three axes: 'production', 'consumption (retail sales)', and 'investment' (construction and facilities). Traditionally, retail sales, which show how much goods retailers have sold, were considered the representative consumption indicator. However, as household consumption has become linked to "service production," it has started to be referenced as an indicator of consumption.
Currently, there are a total of 13 industries included in service production. They are: ▲ Water supply, wastewater, waste management, and recycling industries ▲ Wholesale and retail trade ▲ Transportation and warehousing ▲ Accommodation and food services ▲ Information and communications ▲ Financial and insurance activities ▲ Real estate activities ▲ Professional, scientific, and technical services ▲ Administrative and support and rental services ▲ Educational services ▲ Health and social services ▲ Arts, sports, and recreational services.
The Ministry of Strategy and Finance is referencing this service production more actively as a consumption indicator. A Ministry official stated, "The proportion of retail sales and service production in consumption is roughly 40% to 60%," explaining that the significance of service production is even greater.
In contrast, KDI has only regarded the 'wholesale and retail trade', 'accommodation and food services', and 'arts, sports, and leisure-related services' among service production as consumer metrics. These sectors also showed poor performance last year, leading to the conclusion that "consumption has generally contracted" in tandem with the stagnation of retail sales.
◇ Opinions divided on whether passenger transport, education, and medical services count as consumption?
Experts are also divided in their opinions. First, there is a viewpoint that details such as passenger transport, education services, medical and social welfare, information technology, and travel, which KDI has currently excluded from the consumption metrics, are closely connected to household "final consumption." A statistics expert remarked, "Information technology is directly linked to mobile phone fees, and purchasing travel products from online shopping malls ties into the production of the travel service industry, thus relating to consumption."
However, there is also a viewpoint that it is difficult to distinguish between household consumption and corporate production. A KDI official stated, "Passenger transport, education services, medical and social welfare, accounting and legal services are certainly related to consumption, but corporate demand is also mixed in, making it hard to generalize as household consumption."
This controversy has arisen partly because there are no indicators to accurately measure the short-term trends of 'consumption.' As the industrial structure changes rapidly with the times, it has become increasingly challenging to capture consumption solely based on existing product sales trends. However, the aspects of consumption associated with service production have not been distinctly studied or defined.
The Bank of Korea also noted in a 2019 BOK issue note titled "Monthly service consumption estimation using large-scale data" that "ithas become important to quickly and accurately grasp the trends in service consumption, which is progressively occupying a larger share of private consumption due to increased medical and healthcare expenditures associated with an aging population." However, it pointed out that the service production index published every month frequently shows discrepancies with GDP service consumption, limiting its utility to understand service consumption trends.
Statistics Korea is also aware of this issue and has been developing a new indicator that can encompass both goods and service consumption since last year. This is called the "comprehensive private consumption indicator." Since last year, KDI has started to develop the indicator, establishing some framework, and this year it is conducting a trial calculation in partnership with the Statistical Development Institute. However, it is expected that it will take time before this can be utilized as a practical reference indicator like the industrial activity trends, leading to a continuation of similar controversies for the time being. A Statistics Korea official stated, "This year, we will develop economic statistics that accurately reflect reality, including the comprehensive private consumption indicator."