KDI Warns of Risks in Korea's Overreliance on Semiconductors

[Financial News] South Korea's economy, riding the semiconductor supercycle, is expected to maintain growth in the 3% range this year. Thanks to the dollars earned by semiconductors, the current account surplus for this year and next is projected to exceed $360 billion, a record high never before seen. However, the structural weakness of excessive dependence on the semiconductor industry could become a risk that increases volatility across the entire economy. There are growing concerns that a boom centered on large companies in semiconductors and other sectors will deepen the 'K-shaped divide' and fail to spread evenly to the broader economy.
On the 19th, KDI said it was raising its forecast for this year's economic growth to 3.2%, up 0.7 percentage point from its previous estimate of 2.6%, reflecting explosive global demand for semiconductors. It also raised next year's growth forecast to 2.2%, up 0.5 percentage point from the previous estimate, and said the semiconductor boom would continue through next year.
KDI said 0.6 percentage point of the 0.7-point upward revision came from the 'semiconductor spillover effect.'
KDI had already revised its growth outlook in February and May this year. In February, it had projected growth at 1.9%. In just six months, it lifted the forecast into the 3% range, having failed to anticipate that semiconductor demand would expand and remain this strong.
Investment is also being driven by semiconductors.
Facility investment is expected to rise 7.9% this year and 7.0% next year, led by semiconductors. That is 4.6 percentage points higher than the previous forecast.
Construction investment is expected to remain sluggish through this year, then rise 2.7% next year on the back of semiconductor plant expansions and related projects.
Exports are also expected to post strong growth of 8.7% this year and 5.0% next year, supported by robust global investment in Artificial Intelligence (AI). Those figures were raised by 4.1 and 3.1 percentage points, respectively, from the previous export growth forecasts.
Thanks to semiconductor exports, the current account surplus is also expected to reach a record high of $360 billion this year and next. That is $120 billion to $140 billion higher than the original forecast.
The semiconductor effect is also expected to gradually lift private consumption.
As real gross income rises, private consumption is projected to increase 2.3% this year and 2.0% next year. Still, because the boom is concentrated in the semiconductor sector, the improvement in consumption is likely to be modest.
In particular, real wage growth remains below the average of the past decade, showing that income gains are not spreading broadly across households.
KDI researcher Kim Mi-ru said, "We revised this year's private consumption growth rate upward by only 0.1 percentage point, reflecting the fact that real wage growth remains weak and employment conditions have also deteriorated despite the sharp increase in real gross income."
Inflation and employment are expected to remain challenging.
Consumer prices are expected to continue rising at a high rate of 2.7% this year. The factors include higher global oil prices, increased liquidity in the market from semiconductor bonuses, and exchange rate instability. Next year, the pace of increase is expected to slow to 2.2%.
Unlike the red-hot semiconductor rally, the labor market is expected to remain cold. Slower growth in manufacturing and construction excluding semiconductors is continuing to worsen employment conditions for vulnerable groups, including young people.
As a result, KDI forecast that the number of employed people this year will rise by only 110,000, down 60,000 from its previous estimate. For next year, however, it raised the increase to 200,000, up 30,000 from the previous forecast, citing improving domestic demand and a base effect.
Kim said the reason for the sharp downward revision in this year's employment forecast was that "although semiconductors are booming, their impact on overall employment is limited, and hiring prospects in non-semiconductor industries are also poor."
KDI said the semiconductor boom could be both an opportunity and a risk.
That means the broader macroeconomy, especially the real economy, could be shaken significantly because so much depends on the semiconductor demand cycle.
KDI researcher Kim Ji-yeon said, "If global demand for AI investment weakens or if domestic chipmakers lose global market share amid intensifying competition from semiconductor-producing countries, growth could slow rapidly."
In addition, external and domestic risks such as uncertainty over the United States' tariff policy, instability in the Middle East, greater stock market volatility, and weaker household consumer sentiment could lead to disruptions in raw material supply, higher production costs, inflationary pressure and slower consumption, all of which may threaten economic growth.
Kim said, "There is a wide gap between the 3% growth rate driven by the semiconductor superboom and the economy that most people actually feel, including wage workers at small and medium-sized businesses and the self-employed. Active policy measures, including structural reforms, are needed so that the benefits can spread to other major industries, services and domestic demand."
[email protected] Jung Sang-gyun Kim Chan-mi Reporter