KDI upgrades economic assessment, citing broader semiconductor-led recovery

The Korea Development Institute upgraded its assessment of the South Korean economy Monday, saying the recovery is broadening beyond semiconductors after describing conditions last month as only a "gradual improvement."

The upgrade reflects strong momentum in semiconductor exports and facility investment, along with a pickup in consumer spending on durable goods such as cars and home appliances. Weak job growth and persistently elevated inflation, however, remain risks to the recovery.

In its August economic trends report released Monday, KDI said the economy is "showing signs of a broadening improvement, centered on semiconductor-related sectors."

The assessment marks a step up from last month, when the institute said the economy was "maintaining a gradual improvement trend on the back of strong semiconductor exports and the services sector." KDI said exports and facility investment are posting strong growth led by semiconductors, while consumer spending is also expanding, particularly in durable goods.

Production indicators also improved. Total industrial output rose 4.2 percent year-on-year in June, a sharp acceleration from 1.9 percent the previous month, driven by a rebound in manufacturing as the services sector continued to perform well.

Mining and manufacturing output grew 5.8 percent. Semiconductor production rose only 2.2 percent due to a high base effect, but most other industries turned positive — automobiles up 12.6 percent, machinery and equipment up 14.4 percent, and electrical equipment up 8.8 percent.

The services sector also maintained solid growth, led by finance and insurance, up 9.2 percent, and professional, scientific and technology services, up 13.7 percent. Business sentiment among export-oriented companies stayed above its long-term average on the back of strong semiconductor exports, while sentiment among domestic-demand companies showed gradual improvement.

Consumer spending showed a clearer recovery. The retail sales index growth rate expanded to 4.2 percent in June from 1.5 percent the previous month. Passenger car sales swung sharply from a 10.7 percent decline to a 12.2 percent increase, reflecting an easing of auto parts supply disruptions and a rush in demand ahead of the expiration of an individual consumption tax cut.

Home appliance sales also rose 13.1 percent year-on-year, partly driven by a Samsung Electronics Onnuri gift voucher rebate promotion. KDI cautioned, however, that a significant portion of the gains in auto and appliance sales reflected temporary policy and promotional effects, making it uncertain whether the consumption upturn would continue after July.

Facility investment expanded further as semiconductor-related investment remained solid and other sectors also rebounded. Construction investment, by contrast, continued to lag, particularly in residential building, though non-residential construction showed gradual improvement.

Employment remained the weakest link despite the broader recovery. The number of employed persons rose by 63,000 year-on-year in June, recovering from a decline of 40,000 the previous month but falling well short of the monthly average gain of 183,000 recorded in the first quarter. KDI said the pace of job growth remains on a slowing trend.

Inflation pressures also persisted. The consumer price index rose 2.8 percent in July, returning to the 2 percent range for the first time in three months, as the rate of increase in petroleum product prices fell sharply to 15.5 percent from 24.7 percent the previous month.

Core inflation, which excludes food and energy, edged up to 2.6 percent from 2.5 percent the previous month, however. While falling global oil prices narrowed the overall inflation rate, underlying price pressures remain.

KDI said "domestic and external uncertainties persist, with inflation still at an elevated level and employment conditions weakening, even as US tariff measures and instability in the Middle East continue."