‘Expansionary Fiscal Policy and Semiconductors’ Drive 2% Growth, 2% Inflation and a $230 Billion Surplus [One Year of the Lee Jae-myung Administration]

The Korean economy is now all but certain to grow in the mid-2% range this year. That would mark a remarkable rebound in just one year, considering that growth had fallen to negative territory after eight straight quarters of 0% growth since 2022. Even with the oil shock caused by the Arab-Israeli conflict, consumer prices are expected to stay in the 2% range, and the current account surplus is projected to hit a record high of more than $230 billion this year, driven by a semiconductor export boom.
Economic authorities said that over the past year since the launch of the Lee Jae-myung administration, also known as the People's Sovereignty Government, aggressive fiscal management through swift supplementary budgets, special measures to stabilize everyday prices, and concentrated investment in new industries such as artificial intelligence helped support the rebound in growth. Still, the economy faces threats from a semiconductor-led boom, so-called jobless growth, and deepening K-shaped polarization. A continued decline in potential growth, driven by demographic deterioration and weakness in key industries, is also a major risk for South Korea.
Officials also pointed to the need for swift reform of the eight major social insurance programs, including the basic pension, whose burden is rising as the country ages rapidly. They said labor market innovation and greater flexibility, including continued employment, as well as the AI transition and restructuring of core industries, are tasks that cannot be delayed.
On the 20th, the Ministry of Economy and Finance and the Ministry of Planning and Budget announced the key achievements of the first year of the Lee Jae-myung administration at a State Council of South Korea meeting held at Cheong Wa Dae. The administration took office on June 4 last year.
The Ministry of Economy and Finance said the biggest achievement over the past year was a visible recovery in the economy. Growth in the first quarter of this year reached 1.7% from the previous quarter, the highest in five years and six months. The KOSPI broke through the 7,000 mark. Market capitalization in the stock market rose from 13th in the world in June last year to eighth. Global credit rating agencies, including Fitch Ratings, Moody's Corporation and Standard & Poor's (S&P), kept South Korea's sovereign credit rating on a stable outlook.
If high oil prices persist and the semiconductor boom and domestic demand recovery continue, there is growing hope that the economy can achieve growth in the 2% range this year. Major domestic and foreign investment banks and institutions have already raised their forecasts for South Korea's growth this year to between 2.5% and 2.6%. Deputy Prime Minister and Minister of Economy and Finance Koo Yun-cheol also said at a recent press briefing, "We still need to watch the extent of the semiconductor boom and the impact of the Arab-Israeli conflict, but this year's economic growth rate will likely exceed 2%."
Luck also played a role. Strong semiconductor earnings, improving domestic demand and a stock market that surpassed 7,000 all fed into tax revenue. Under this trend, national tax revenue this year is expected to rise by 41.5 trillion won from a year earlier.
As the government's fiscal room improves, its expansionary stance is expected to gain even more momentum. The case for so-called active fiscal management, which seeks to boost domestic demand and new AI industries while enlarging GDP and lowering the national debt ratio, is also likely to strengthen under the GDP denominator expansion theory.
The Ministry of Planning and Budget said the government's swift supplementary budgets, funded by excess tax revenue, also helped stimulate the economy and stabilize livelihoods. It cited the effect of consumer coupons in July last year, noting that private consumption's contribution on a year-on-year basis rose to 0.9 percentage points in the second half of last year from 0.3 percentage points in the first half, a threefold increase. Over the past year since taking office, the government has executed a total of 58 trillion won through two supplementary budgets, including measures for livelihood recovery and support payments for damage caused by high oil prices.
Exports were what created the miracle in the Korean economy over the past year.
Exports in the first quarter, led by AI semiconductors, lifted South Korea from eighth to fifth place globally and significantly raised the country's economic standing. Thanks to that, the current account surplus reached a record $73.8 billion in the first quarter. Looking ahead, the current account surplus this year and next is expected to write a new chapter never seen before. According to KDI, this year's current account surplus will reach $239 billion, more than double last year's figure.
Inflation is also being managed relatively stably in the low- to mid-2% range. In response to the surge in global oil prices caused by the Arab-Israeli conflict, the government introduced an oil price cap system for the first time in 29 years. It also cut fuel taxes further. The Ministry of Economy and Finance said these measures lowered consumer prices by 0.6 percentage points in March and 1.2 percentage points in April.
However, inflation is likely to face more upward pressure from income gains tied to the expansionary economy and strong corporate earnings, exchange-rate volatility and the government's fiscal push to stimulate domestic demand. Price uncertainty remains high depending on the prolonged Arab-Israeli conflict and whether the oil price cap system, which is being artificially suppressed with at least 5 trillion won in fiscal spending, will continue. Inflation could rise into the 3% range within months.
A weakening labor market, which is becoming entrenched alongside the spread of AI, is another challenge the government must address. Despite the semiconductor boom and economic expansion, labor market sluggishness is expected to continue. More diverse and sustained measures are needed to reverse youth employment, which has been falling for 24 consecutive months among people aged 15 to 29.
skjung@fnnews.com Jung Sang-gyun