Bank of Korea: "If Semiconductor Export Volume Rises Over 20%, Growth Above 3% Possible"

May Economic Outlook

Despite a Strong First Quarter, Second Quarter Growth Expected at 0.2%

Semiconductor Performance Helps Buffer Middle East Shock

Growth Could Fall to Low 1% Range If Negative Scenarios for Semiconductors and Middle

The Bank of Korea has projected that if this year's growth rate of semiconductor export volume exceeds last year's level and expands to the mid-20% range, the annual economic growth rate could surpass 3%.

On May 28, the Bank of Korea raised its forecast for South Korea's economic growth rate this year from 2.0% to 2.6% in its "May Economic Outlook."

This projection is based on several assumptions: military tensions in the Middle East will gradually ease, allowing the volume of traffic through the Strait of Hormuz to moderately recover to around 60% in the fourth quarter of the year; the international oil price (Brent crude) will rise to an average of $103 per barrel in the second quarter and then fall to around $95 in the second half. For semiconductors, it is assumed that the export volume growth rate will remain at a level similar to last year's 16%, and will gradually slow to around 10% next year.

Specifically, the Bank of Korea estimated that the shock from the Middle East conflict would drag down the growth rate by 0.4 percentage points, but the improved semiconductor market leading to strong IT exports would raise it by 0.7 percentage points. The supplementary budget and a booming stock market are also expected to contribute increases of 0.2 percentage points and 0.1 percentage points, respectively, to the growth rate.

Looking at the growth by quarter, the first quarter posted a surprising 1.7% increase from the previous quarter, and the second quarter is projected to see a 0.2% quarter-on-quarter growth. The Bank of Korea noted, "Despite the impact of the Middle East war and the base effect from the sharp growth in the previous quarter, semiconductor exports are continuing a strong trend," and added, "Government policies such as the supplementary budget and corporate responses are expected to buffer the shock originating from the Middle East." In the third quarter, growth is expected to slow to 0% due to production disruptions in some industries caused by global energy supply-demand imbalances, but growth is projected to resume in the fourth quarter (0.4%) as energy supply chains gradually normalize.

The growth forecast for next year has been revised upward from 1.8% to 2.1%. This reflects expectations that as the situation in the Middle East stabilizes and oil prices gradually decline, improved earnings in IT companies will bolster income conditions and strengthen consumption momentum.

However, the Bank of Korea assessed that the uncertainty surrounding the forecast path is higher than ever. Accordingly, it presented both optimistic and pessimistic scenarios, separately considering the semiconductor market and the Middle East conflict.

First, if the semiconductor export volume growth rate expands to the mid-20% range this year and continues at a high level in the mid-10% range next year, South Korea's growth rate could be 0.5 percentage points higher than the baseline forecast. If both semiconductor demand and production capacity surpass expectations, the annual growth rate could reach as high as 3.1%. Conversely, if some big tech (large IT companies) slow their investment pace, combined with shrinking demand for electronics such as PCs and smartphones, the annual growth rate forecast could be lowered by 0.3 percentage points.

Regarding the Middle East situation, if tensions ease early and international oil prices stabilize rapidly, falling to an average of $80 in the second half of the year, the annual growth rate is expected to increase by 0.1 percentage points. Conversely, if the volume of traffic remains at around 30-40% until the end of the year and international oil prices stay high above $100, this could further drag down this year's growth rate by an additional 0.5 percentage points.

The Bank of Korea stated, "If both the semiconductor market and the Middle East situation develop in either an optimistic or pessimistic direction at the same time, the impact on the Korean economy will exceed the arithmetic sum of each scenario," and added, "In particular, if pessimistic scenarios overlap, negative feedback between the financial and real sectors could further amplify the growth slowdown."

Meanwhile, the inflation forecast for this year has been raised from the previous 2.2% to 2.7%. This assumes not only a sharp rise in petroleum prices but also the delayed spillover of high oil prices to non-petroleum items. For core inflation, as the impact of high oil prices spreads to manufactured goods and personal services in the second half of the year, it is projected to rise by 2.4%, significantly higher than the previous forecast of 2.1%.

On a monthly basis, both consumer and core inflation are expected to reach their peak levels this year in August, partly due to the base effect from last year's telecommunications fee discounts.

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