[The Editors' Verdict] The Semiconductor Mirage and the Other Side of Economic Indicators

Denominator Effect of Cyclical Boom and Delayed Domestic Recovery
Need for Macroeconomic Risk Management and Household Debt Restructuring

The recently released key macroeconomic indicators for the first quarter of this year show remarkable results, at least in terms of the numbers. According to the Bank of Korea, the nominal gross domestic product (GDP) growth rate for the first quarter was 10.5% compared to the previous quarter, marking double-digit growth for the first time since 1976. As a result, there are growing expectations that the annual nominal growth rate for this year will reach the 10% range, and that the ratio of household debt to nominal GDP—one of the government’s managed targets—will stabilize downward, aided by the expansion of the denominator. In fact, the household debt ratio for the first quarter of this year is estimated to have dropped sharply from 88.2% at the end of last year to around 85%, approaching 85.11%. It is clear that this decline in the debt-to-GDP ratio, driven by the increase in nominal GDP, has positive implications for macroeconomic soundness.

Of course, it is natural for the absolute amount of debt to increase as the economy grows. There is no reason to unconditionally view the expansion of credit supply and debt growth negatively. However, what is important is to ensure that, even as the absolute amount of debt rises, it does not increase excessively relative to the size of the economy, which could lead to systemic risk. From this perspective, the government’s policy direction—to gradually reduce the household debt ratio, which peaked at 99.1% in the third quarter of 2021, to around 80% by 2030—and the recent improvement in indicators can be considered meaningful policy achievements.

Notably, this improvement in the indicators is significant because it is not solely due to the expansion of the denominator—nominal GDP—driven by semiconductors. The government’s commitment to managing the numerator, namely the total amount of household debt, by tightening lending regulations and capping its annual growth at around 1.5%, also played a role. With both the denominator expanding and the numerator being managed, if the annual nominal growth rate reaches 10% this year, the household debt ratio is estimated to fall to 81.8% by year-end; if growth reaches 12%, it could drop to 80.3%. However, since a recent uptick in household loan growth has been observed, it is necessary to check future quarterly detailed money flow statistics and changes in household loan composition to more accurately determine whether the authorities’ management approach has become a sustainable trend on the ground.

What needs to be guarded against is complacency based on statistical figures and an overly optimistic outlook that underestimates risks beyond next year. As Bank of Korea Governor Rhee Changyong pointed out, the current high-growth phase is more akin to a cyclical boom, where "even if we produce the same goods, international prices have risen significantly, so sales amounts have changed." In fact, the 12.9% increase in the GDP deflator for the first quarter was largely due to a sharp 23.5% jump in the export deflator. However, in contrast to these improvements in nominal indicators, the real income growth rate for households was only 0.4%, and the proportion of deficit households reached 27.4%, meaning micro-level indicators remain weak. Because the current expansion of the denominator is based on rising export prices rather than structural improvements in the economy, if the semiconductor cycle enters a downturn after this year, the apparent stability in the indicators could quickly weaken.

Even though the debt ratio has decreased, it does not mean the absolute burden has eased. The threshold at which household debt starts to constrain growth is generally cited at 80–85% of GDP. While, on paper, the ratio has dropped to the brink of this threshold, underlying the ratio’s decline are the burdens of principal and interest repayments that have accumulated amid high interest rates, alongside weakened consumption power. With the macroeconomic outlook for next year still uncertain, there is no room for complacency or the belief that “our economy is now completely sound just because the debt ratio has fallen.”

Ultimately, the current improvement in indicators should be seen as a process of guiding the debt ratio into a manageable range, while acknowledging the natural increase in debt that comes with economic growth. Rather than being lulled into a false sense of security by the statistical illusion, now is the time to use the breathing room provided by the semiconductor boom as an opportunity to improve the structure of household debt. The authorities must closely examine vulnerabilities behind the impressive growth indicators and swiftly implement debt restructuring measures that go beyond mere indicator management.

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