Semiconductors Outpace Inflationary Pressures... Korea Eyes 3% Growth Rate [Monetary Policy Committee Poll] ②

Asia Business Daily Survey of 13 Economic Experts

Most Forecast 2.6% Growth for Korea, Some See 3.0%
Inflation Outlook Raised Across the Board on High Oil Prices and Strong Dollar

Inflation and Semiconductors Are the Key Rate Decision Var

With the Bank of Korea set to announce its base interest rate decision and economic outlook on May 28, experts forecast that South Korea's economic growth rate will exceed 2.5% this year. Despite concerns over supply shocks stemming from the Middle East crisis, some experts even predict 3.0% growth this year, citing the stronger-than-expected impact of the semiconductor supercycle. As the Bank of Korea has hinted at a possible pivot in policy, inflation and semiconductor performance were most frequently cited as the key variables for monetary policy. Bolstered by the solid growth rate, experts believe the Bank of Korea's monetary policy will continue to focus on price stability.

2.6% Growth Rate Most Common This Year... "Bank of Korea Likely to Raise Its Forecast to Mid-2% Range"

According to a survey conducted by The Asia Business Daily from May 19 to 22 with 13 economic experts from domestic and international economic research institutes, securities firms, and banks, all respondents (with one non-response) expected South Korea's economic growth rate to exceed 2.5% this year. Specifically, four experts pointed to 2.6%, making it the most common prediction, while two expected 2.5%. Half of the respondents anticipated growth of 2.7% or higher, with two each projecting 2.7% and 2.8%, and two experts even forecasting 3.0% growth.

This result stands in stark contrast to last April's survey, when heightened uncertainty over the Middle East conflict led to reduced growth forecasts, with projections dropping to around 2.0%. At that time, 45% of the 11 experts surveyed lowered their growth forecasts, with the upper end of projections reaching only 2.1%.

The sharp turnaround in growth outlook over the past month is attributed to the unexpectedly prolonged and robust semiconductor supercycle. Park Sanghyun, a researcher at iM Investment & Securities, said, "The stronger-than-expected semiconductor supercycle will drive export performance and facility investment," raising his growth forecast for this year to 2.8% when the effects of fiscal policy are also factored in. Baek Yoonmin, a researcher at Kyobo Securities, also stated, "Despite supply-side inflationary pressures, the benefits of the AI cycle are expected to be significant."

The surprise first-quarter growth rate of 1.7% has also contributed to upward revisions in growth forecasts. Jo Yonggu, a researcher at Shin Young Securities, observed, "Given the first-quarter growth surprise, the continued increase in corporate profits, strong export data, and the implementation of a large-scale supplementary budget, I expect this year's growth rate to be 2.6%."

The semiconductor industry is estimated to have contributed about half of South Korea's economic growth. Yoon Yoosam, a researcher at Meritz Securities, who raised his growth forecast from 2.1% to 2.6%, commented, "Given that the semiconductor and related industries contributed approximately 0.8 percentage points to first-quarter growth, semiconductors could account for about half (1.3 percentage points) of annual growth. Considering the ongoing semiconductor boom, there is potential for further upward revision." Han Junhoo, a senior researcher at NH Financial Research Institute, estimated that since semiconductors made up about 28% of total exports in the first quarter, their direct contribution to net export growth (1.4 percentage points) would be around 0.4 percentage points for the semiconductor sector alone.

Experts who raised their growth forecasts to 3% also cited the semiconductor boom as the driving force. Kang Minjoo, Chief Economist at ING Bank, said, "Semiconductor exports are more resilient than expected and this trend is likely to continue for some time. Additionally, postwar reconstruction projects in the Middle East, increased demand for power generation due to surging electricity needs, and rising global defense spending are expected to further support Korea's export growth."

Accordingly, experts expect the Bank of Korea to also raise its growth forecast for this year to the mid-2% range in its upcoming economic outlook. All 11 experts who responded to this question expect the central bank to raise its forecast from the previous 2.0% to 2.5~2.6% or even up to 2.8%.

High Oil Prices and Exchange Rates Lead to Higher Inflation Forecasts... Key Rate Decision Variables: 'Inflation + Semiconductors'

Due to high oil prices and exchange rates resulting from the Middle East conflict, all respondents raised their forecasts for consumer price inflation. Half of the respondents (6 people, with one non-response) predicted that South Korea's consumer price inflation would reach 2.6% this year. Four experts forecasted 2.7%, while one each predicted 2.5% and 2.8%. All of these figures exceed the Bank of Korea's February forecast of 2.2%.

Experts cited the continued high oil prices despite government efforts to stabilize energy markets, noting that rising energy prices could be reflected in consumer inflation with a time lag. In addition, the unexpectedly high exchange rate trend and increased demand pressures stemming from the supplementary budget were also seen as upward pressures on inflation. Ahn Jaekyun, a researcher at Korea Investment & Securities, said, "The prolonged period of high oil prices is causing some secondary effects, which will push up both overall and core inflation rates."

Han Junhoo, a senior researcher who forecasted a 2.8% inflation rate for the year, noted, "We already observed a 2.6% increase in consumer prices in April. Factoring in the additional pass-through from higher oil prices and demand increases from economic recovery, the annual average could rise to around 2.8%. This figure assumes that the impact of the Middle East conflict will subside toward the end of the year; if the conflict is prolonged, inflation could surpass this level."

While the consensus is for the base interest rate to remain unchanged this month, experts unanimously agreed that the Bank of Korea's future monetary policy will be heavily influenced by high inflation and the semiconductor business cycle. All 11 respondents (with two non-responses) cited "inflation driven by high oil prices" as a key factor, and seven of them also pointed to strong semiconductor exports as a variable.

With the semiconductor boom expected to push growth up to the mid-to-high 2% range, there is widespread analysis that the Bank of Korea's future monetary policy will likely focus on price stability. As both growth and inflation are expected to rise, there are views that the timing of a rate hike may be brought forward. Kang Seungwon, a researcher at NH Investment & Securities, explained, "If there is an oil price shock, the primary focus will inevitably be on price stability. Since the Bank of Korea's founding mission is also price stability, it will likely maintain that focus for the time being."

However, some noted that the pace and scale of rate hikes may depend on how the Bank of Korea assesses next year's growth outlook. Kang Seungwon said, "The number of rate hikes will likely depend on next year's growth projection. Depending on the outlook, the market will judge whether the Bank of Korea will act more conservatively or proactively."

Experts Participating in the Survey (in alphabetical order)

Kang Minjoo, Chief Economist at ING Bank; Kang Seungwon, Researcher at NH Investment & Securities; Gong Dongrak, Researcher at Daishin Securities; Kim Seongsu, Researcher at Hanwha Investment & Securities; Park Sanghyun, Researcher at iM Investment & Securities; Park Seokgil, Economist at JP Morgan; Baek Yoonmin, Researcher at Kyobo Securities; An Yeha, Researcher at Kiwoom Securities; Ahn Jaekyun, Researcher at Korea Investment & Securities; Yoon Yoosam, Researcher at Meritz Securities; Jeong Seongtae, Researcher at Samsung Securities; Jo Yonggu, Researcher at Shin Young Securities; Han Junhoo, Senior Researcher at NH Financial Research Institute

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