South Korean consumption recovery to be supported by income and credit growth

The impressive consumption growth (1.1% qoq) in Q3 2015 should be interpreted as the beginning of a much-awaited consumption recovery in addition to normalisation after the negative shock caused by MERS. The consumption recovery is expected to continue into 2016 as steady increases in jobs and wages lead to steady growth in household income growth.

The recent strength in consumption suggests that the rise in the household savings rate since 2013 has finally ended, and it is believed that the savings rate will gradually decline in 2016 thanks to sustained strength in household credit growth and the wealth effect from the rise in house prices. 

The government's measures to stabilise household debt which will take effect from the end of 2015 are unlikely to put a significant drag on household credit growth, as they merely reinforce existing measures to encourage fixed-rate, amortised mortgages and the BoK's accommodative policy stance will persist.