KDI: Semiconductors, services hold up economy as construction, jobs lag

The Korea Development Institute said the economy is maintaining a gradual improvement, driven by strong semiconductor exports and a resilient services sector, though prolonged weakness in construction investment and deteriorating manufacturing employment remain obstacles to a broader recovery.

In its July economic trends report released Wednesday, KDI said "the economy is sustaining a gradual improvement as semiconductor exports and the services sector are driving growth, even as manufacturing production has undergone some adjustment." The institute also noted that surging global semiconductor demand, fueled by expanding AI investment, continues to underpin both exports and facility investment.

June exports rose 70.9 percent from a year earlier, sustaining a high rate of growth. AI-related demand drove semiconductor exports up 179.6 percent and computer exports up 281.6 percent. Petroleum product exports also climbed 39.8 percent as higher international oil prices lifted export unit prices. Imports rose 30.1 percent over the same period, but the larger gain in exports pushed the trade surplus to $36.15 billion.

On the production side, the services sector served as the main pillar. Services output rose 4.9 percent in May, led by finance and insurance and by professional, scientific and technology services, with the pace of growth accelerating from the previous month. Mining and manufacturing output, by contrast, fell 0.9 percent, as a slowdown in semiconductor output was compounded by a fire at an auto parts supplier and weakness in petroleum refining and chemical products. Manufacturing inventory ratios rose while average operating rates fell, signaling a continued adjustment phase.

Consumer spending continued its gradual recovery. Retail sales rose 1.7 percent in May. Passenger car sales were temporarily sluggish, but spending on semi-durable and non-durable goods increased, supported in part by government policies, underpinning overall consumption. Service industries closely tied to consumer activity, including accommodation and restaurants, also continued to improve.

Facility investment maintained its semiconductor-led strength. Investment rose 9.7 percent in May, with spending on semiconductor manufacturing equipment posting a particularly large increase. KDI said that, given rising machinery imports, semiconductor-centered investment expansion is likely to continue for now.

Construction activity, however, remained weak. Construction work completed fell 1.9 percent in May — a slightly narrower decline — but residential building continued to lag. KDI warned that rising construction costs, driven by Middle East tensions and a high exchange rate, could constrain any future recovery.

The labor market also showed signs of cooling. The number of employed workers fell by 40,000 from a year earlier in May, turning negative. The decline in manufacturing employment widened sharply, and both the employment rate and the economic participation rate fell, particularly among youth. Services sector employment, however, continued to grow, supported by improvement in accommodation and restaurant industries.

Consumer prices remained elevated. The consumer price index rose 3.2 percent in June, driven by higher international oil prices. Petroleum product prices continued to push inflation higher, while core inflation held at 2.5 percent. KDI said that although international oil prices have fallen as Middle East tensions eased, import prices for crude oil remain high due to a lag effect, meaning inflationary pressure is likely to persist for now.