Bank of Korea: "Ripple Effect of Semiconductors to Spread Across the Entire Economy Next Year"

August Economic Outlook Briefing

“Economic Structure Shifting to Increase Importance of IT”
“Semiconductor Cycle Expected to Continue Through First Half of Next Year”
The Semiconductor Butterfly Effect... “Next Year, Domestic Demand Expected to Contribute to Growth as Much as Exports”

The Bank of Korea has forecast that the semiconductor industry’s upward momentum, driven by supply shortages, will continue at least through the first half of next year. It also assessed that Korea’s economic structure is being reorganized around IT manufacturing, fueled by this semiconductor-led growth expected to last into next year. As a result of this so-called “semiconductor butterfly effect,” domestic demand is expected to contribute to growth next year as much as exports.

Jiho Lee, Deputy Governor of the Bank of Korea (fourth from the left), is speaking at the August economic outlook briefing held on the afternoon of the 27th. Courtesy of the Bank of Korea

Dongryul Lee, Director General of the Bank of Korea’s Economic Research Department, stated at the August Economic Outlook briefing held on the afternoon of the 27th, “The share of IT manufacturing in nominal GDP rose to as high as 16.4% in the first quarter of this year,” and added, “The Korean economy is being restructured to increase the weight of IT manufacturing.”

In its August Economic Outlook, the Bank of Korea sharply revised its projection for this year’s real GDP growth rate from 2.6% to 3.3%. Next year’s growth outlook was also upgraded substantially, from 2.1% to 2.9%.

Regarding the reason for projecting growth close to 3% next year, following this year, Director General Lee said, “Despite the base effect of this year’s high growth rate, we expanded next year’s growth outlook because we expect the semiconductor upturn to continue. The ripple effects are also expected to broaden significantly across the entire economy next year, moving beyond their current concentration in exports and investment.”

He also explained that as the share of IT manufacturing, including semiconductors, in nominal GDP increases, this composition leads to an even greater amplification of the calculated growth rate. Lee commented, “Since IT manufacturing now accounts for a larger part of the national economy, its weight in growth calculations has doubled, meaning that the sector’s contribution to growth has also doubled. With IT manufacturing expected to maintain a high growth rate into next year, next year’s aggregate growth rate is projected to be higher as well.”

He continued, “This means that Korea’s economic structure is being reorganized to further elevate the importance of the IT manufacturing sector.” Deputy Governor Jiho Lee also noted, “You can interpret next year’s growth outlook as evidence that our economy’s growth momentum is becoming even clearer.”

As the positive effects from semiconductors spread, the Bank of Korea forecast that next year, the share of domestic demand in contributing to growth will rise to a level similar to exports. According to the August Economic Outlook report, the net growth contribution (year-on-year) of domestic demand and exports is expected to change from 0.9 percentage points and 2.1 percentage points, respectively, in the second half of this year to 1.3 percentage points and 1.2 percentage points in the first half of next year. For the second half of next year, domestic demand is projected to contribute 1.8 percentage points, with exports contributing 1.4 percentage points, indicating that domestic demand may have the larger impact.

Regarding when income gains from the strong semiconductor sector will spill over into consumption, Lee remarked, “Currently, consumption is spreading mainly in regions benefitting from the semiconductor industry, and although still limited, some specific products are seeing increased consumption. Next year, with larger performance bonuses at semiconductor companies and increases in both employment and goods available for purchase, overall consumption is expected to expand.” Deputy Governor Lee added, “Considering that business sentiment continues to improve, we can expect the economic momentum to spread beyond semiconductors to other industries as well.” However, Director General Lee also cautioned, “If spending flows into real estate, the recovery in consumption may slow; it is difficult to predict where the benefits of growth will ultimately go.”

As for the semiconductor cycle, Lee anticipated the current trend would continue at least through the first half of next year. He noted, “Any peak beyond that will depend on how long AI-related demand holds up and how rapidly semiconductor firms are able to increase supply.”

Turning to inflation, the Bank of Korea projected that inflation would likely remain above its 2.0% target level through next year as well. Lee explained, “Consumer and core inflation are expected to stay elevated for the time being. While consumer inflation is forecast to decline next year amid falling oil prices, core inflation is likely to remain high through the middle of next year due to cost shocks, the pass-through of secondary shocks, and heightened demand-side inflationary pressures.”

In its August Economic Outlook, the Bank of Korea held its forecasts for consumer price inflation steady at 2.7% for this year and 2.3% for next year but raised its projections for core inflation to 2.5% for both this year and next.

Addressing criticism that the Bank might be overestimating demand-side inflationary pressures, despite factors such as economic polarization possibly keeping such pressures in check, Deputy Governor Lee stated, “It is true that polarization clearly slows (demand-side inflationary pressures), but considering the impact of the conflict in the Middle East and semiconductor prices, conditions conducive to demand-side pressure have in fact increased compared to earlier forecasts. For both this year and next, we raised our projections by 0.1 and 0.2 percentage points, respectively, over our May outlook, and we do not think these forecasts overstate demand-side inflationary pressures.”

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