Nominal GDP Surges: Household Debt-to-GDP Ratio Nears 85% in Q1

With the semiconductor boom driving a 10% surge in nominal GDP,
the household debt-to-GDP ratio is also set to decline sharply
A potential drop from 88.2% at the end of last year to around 85%
Threshold of '80-85%' cited by Governor Rhee Chang-yong
Early achievement of the 80% target possible this year if current conditions persist

Thanks to the semiconductor boom, South Korea's nominal gross domestic product (GDP) surged in the first quarter of this year, and as a result, the household debt-to-GDP ratio—calculated with GDP as the denominator—is expected to drop sharply. There is a growing possibility that the ratio will reach the threshold level mentioned by Bank of Korea Governor Rhee Chang-yong in the first quarter of this year. If the current economic conditions and household debt regulations persist, the government’s target of reducing the ratio to 80% by 2030 may be achieved early, possibly by the end of this year.

According to estimates based on the Bank of Korea’s formula for calculating the household debt-to-GDP ratio, the ratio is expected to fall to around 85% in the first quarter of this year.

The household debt-to-GDP ratio is calculated by dividing the core debt (household and nonprofit organization loans and government loans, as recorded in the flow of funds statistics) by the sum of the nominal GDP for the most recent four quarters. The nominal GDP from the second quarter of last year to the first quarter of this year was a total of 2,788.8 trillion won. If the core debt at the end of last year (2,359.7239 trillion won) is combined with the 14 trillion won increase in household credit in the first quarter of this year, the household debt-to-GDP ratio for the first quarter comes out to 85.11%. Taking into account government loans and nonprofit organization statistics, the ratio is expected to be close to 85% for the first quarter.

A household debt-to-GDP ratio of '85%' is a figure not seen since the second quarter of 2018 (85.5%). After entering the 85% range in the first quarter of 2018, the ratio continued to climb, surpassing 90% in the first quarter of 2020 and peaking at 99.1% in the third quarter of 2021. Since then, it has gradually fallen, reaching 89.6% at the end of 2024 and 88.2% at the end of last year.

Although it is difficult to generalize due to different economic conditions across countries, numerous international studies view a household debt-to-GDP ratio of 80-85% as the threshold at which household debt does not constrain economic growth. The Bank for International Settlements (BIS) presented 85% as the threshold after empirically analyzing data from 18 OECD advanced economies over a 30-year period (1980–2010). The BIS found that when the ratio exceeds this threshold and grows excessively, the increased burden of principal and interest repayments on households not only dampens consumption but also leads financial institutions to over-allocate funds to household mortgage loans, rather than to real-economy investments, negatively impacting long-term growth.

Bank of Korea Governor Rhee Chang-yong also cited a threshold for the household debt-to-GDP ratio in the 80-85% range during his confirmation hearing in April. Governor Rhee explained, “There is some uncertainty in measuring the threshold, but it is generally considered to be around 80-85% of GDP. If it is below this level, there is little constraint on growth, but exceeding it means the ratio may start to affect growth.” Thus, if the household debt-to-GDP ratio drops to around 85% in the first quarter, risks of household debt restraining economic growth will largely subside.

If the current economic situation and household debt management continue, some expect that the household debt-to-GDP ratio could fall below the government's safety line of 80% by the end of this year. In April, the government announced a plan to manage the growth rate of household loans to 1.5%—less than half the anticipated nominal growth rate—by focusing on “decoupling the real estate market from finance,” and to stabilize the household debt-to-GDP ratio at around 80% by 2030.

Jang Min, Senior Research Fellow at the Korea Institute of Finance, said, “That nominal GDP has grown faster than household debt, causing the ratio to fall, means income capacity has increased, which is positive for the economy. The current administration is likely to maintain its regulatory stance on household debt to shift capital flows away from real estate and stabilize the housing market. If the sharply increased GDP remains at this level, the decline in the household debt-to-GDP ratio may not be just a temporary phenomenon.”

This content was produced with the assistance of AI translation services.