Bank of Korea report highlights limited buffers compared to the Dot-com era; warns of "Wealth Effect" reversal and AI labor displacement.

(C) Axios

SEOUL — The Bank of Korea (BOK) issued a stark warning on Friday, stating that a potential collapse of the U.S. stock market bubble could trigger a deeper contraction in consumer spending than during previous crises. According to the BOK’s report, "Assessment of Vulnerabilities in Recent U.S. Consumption," the lack of economic buffers means a major market correction could lead to a "hard landing" for the world’s largest economy.

The "Wealth Effect" at Risk
The central bank’s analysis focuses on the sensitivity of U.S. consumption to stock price fluctuations. While a 10% drop in stock prices would only shave 0.3 percentage points off annual consumption growth, a 30% crash—comparable to the Dot-com bubble burst—is projected to cause a 1.7 percentage point plunge in consumption growth.

The BOK noted that during the early 2000s, a strong housing market and robust employment helped absorb the shock of falling stocks. However, the current environment is far more precarious. "With housing and labor markets already slowing under the weight of persistent inflation, household resilience is significantly more limited today," the report stated.

Structural Vulnerabilities
The BOK identified several "latent risks" that threaten to hollow out American purchasing power:

Labor Market Shifts: Potential labor displacement caused by rapid AI integration and the risk of overstated employment statistics.
Inflationary Pressures: Corporate "pass-through" effects where tariffs are shifted to consumers, combined with tightening immigration policies that could strain labor supply.
Income Inequality: U.S. consumption has become increasingly dependent on high-income brackets. While rising stock prices added roughly 0.4% to consumption last year via the "Wealth Effect," a reversal would force high-spenders to tighten their belts instantly.

Implications for South Korea
The report emphasizes that the South Korean economy is deeply intertwined with U.S. AI investment and consumer demand. If the U.S. faces a consumption cliff, Korean exports—particularly in semiconductors and tech—could face a severe downturn.

The BOK urged policymakers to look past the surface-level expansionary effects of current fiscal policies. "We must carefully monitor whether these underlying vulnerabilities are being masked by temporary stimulus, as they could amplify the potential for a systemic shock," the central bank concluded.