---

The Severe Slump in Domestic Consumption: Why Over 1 Million Businesses Shut Down in South Korea Last Year

The Korean economy, long considered one of the most dynamic in Asia, faced a striking and alarming milestone last year: more than 1 million business closure filings were reported. This figure is not just a number—it represents a profound structural challenge facing the nation’s domestic market, especially small and medium-sized enterprises (SMEs) that form the backbone of the Korean economy.

In this article, we will explore the underlying causes, the sectors most affected, and what this means for Korea's economic future.

1. Understanding the Scale: A Historic Wave of Closures

According to official government data, over 1 million businesses in South Korea filed for closure in the past year. This represents the highest annual figure on record, signaling the severity of the current domestic recession.

While some degree of business turnover is natural in any market economy, this scale of closures in such a short period is exceptional and indicates a systemic problem. Even more concerning is that these closures were not limited to specific sectors but were widespread across retail, food and beverage, education, tourism, and even technology services.

2. Root Causes of the Consumption Slump

Several intertwined factors contributed to this unprecedented wave of business failures:

2.1. High Interest Rates and Tight Monetary Policy

Following the global inflation surge post-pandemic, the Bank of Korea raised interest rates aggressively to stabilize prices. However, this had a chilling effect on consumer spending and business investment. With rising loan burdens, many SMEs found it unsustainable to continue operations.

2.2. Shrinking Consumer Spending Power

Household debt in Korea has been one of the highest among OECD countries. With increasing living costs, stagnant wages, and rising mortgage payments, consumers cut back on discretionary spending. The once-vibrant domestic consumption landscape began to shrink, particularly in sectors such as dining, leisure, and fashion.

2.3. Prolonged Impact of COVID-19

Although the pandemic has largely subsided, its economic scars remain deep. Many businesses never fully recovered from the revenue losses experienced during lockdowns. Consumer patterns have also changed permanently, with more people favoring online shopping and home-based leisure activities, reducing foot traffic in traditional retail and service areas.

2.4. Demographic Crisis

Korea's rapidly aging population and declining birth rate also play a critical role. A shrinking working-age population means fewer consumers and less vibrant urban commercial districts, which exacerbates the downturn in local businesses.

2.5. Fierce Competition and Market Saturation

Even as demand shrinks, the Korean market remains saturated with similar businesses, especially in food services and retail. This leads to cutthroat competition, price wars, and ultimately, unsustainable profit margins.

3. Which Sectors Were Hit the Hardest?

The closures were not evenly spread across all industries. Based on the available statistics:

• Food and Beverage (F&B): The most affected sector. Many small cafes, restaurants, and bars closed due to reduced consumer spending and skyrocketing ingredient costs.

• Retail: Small neighborhood shops struggled to compete with e-commerce giants and large franchises.

• Private Education (Hagwons): Some academies shut down due to decreasing student numbers, influenced by demographic shifts and changing education trends.

• Tourism and Hospitality: Still recovering from pandemic restrictions, many travel agencies and guesthouses could not survive the prolonged slump in both domestic and international tourism.

4. Government Support: Too Little, Too Late?

The Korean government did offer financial support packages, including low-interest loans and temporary tax relief, but critics argue that these measures were insufficient to prevent widespread closures. Many small business owners have voiced concerns that the aid primarily provided short-term liquidity but did not address fundamental problems such as high fixed costs and sluggish consumer demand.

Moreover, as monetary tightening continued, access to credit became more challenging, especially for businesses already labeled as high-risk.

5. The Broader Economic Implications

The surge in business closures is not just a microeconomic issue; it has serious macroeconomic implications:

• Employment: Many of the closed businesses were labor-intensive SMEs. Their closure directly translates to rising unemployment, particularly among younger and older workers.

• Regional Decline: Local commercial zones, especially in non-metropolitan areas, are experiencing rapid decline, leading to further regional imbalances.

• Deflationary Pressure: Weak domestic demand coupled with falling consumer confidence could push the economy towards deflation—a prolonged period of stagnant or falling prices—which is notoriously difficult to escape.

6. What’s Next? Possible Recovery Scenarios

Experts suggest that without a bold strategy to stimulate domestic demand, Korea may face a prolonged period of low growth and recurring business failures. Some potential policy directions include:

• Expansionary Fiscal Policy: Direct consumer stimulus, such as cash vouchers or tax rebates, to encourage spending.

• Structural Reforms: Support for digital transformation and business diversification, helping SMEs move into growth sectors.

• Interest Rate Adjustments: Gradual easing of interest rates to reduce financial pressure on households and businesses.

However, given global uncertainties and the Korean central bank’s cautious stance, a rapid turnaround appears unlikely in the short term.

Conclusion

The record number of business closures last year paints a sobering picture of the current Korean economy. It highlights the vulnerabilities of over-reliance on consumer spending in an era of high debt, rising costs, and demographic challenges.

For Korea to reverse this trend, a fundamental rethink of domestic economic policy is urgently needed—not just temporary financial aid, but sustainable strategies to rebuild consumer confidence and support long-term business viability.