Semiconductor boom benefits concentrated, but spillover expected, Bank of Korea says

The Bank of Korea said the gains from the recent semiconductor boom remain concentrated in certain sectors and regions — particularly large IT companies — but expects the benefits to spread to other parts of the economy over time. Asked about concerns that heavy reliance on the semiconductor cycle could sharply inflate the national debt burden once the cycle turns, the central bank withheld judgment, citing "high uncertainty."

The remarks came in a written response the BOK submitted through the office of People Power Party lawmaker Kim Sang-hoon, a member of the National Assembly's Finance and Economy Planning Committee. Asked to explain the basis for its view that strong semiconductor exports are feeding through to domestic demand broadly, the BOK said equipment investment in the first half of this year maintained strong growth, led by semiconductor machinery, while non-residential construction — including semiconductor factories — helped cushion the blow from the Middle East war on overall construction investment.

On household consumption, the BOK said "some impact from income growth, including performance bonuses in the IT sector, is beginning to appear." However, the report it cited as evidence was limited to areas with a high concentration of semiconductor workers, such as Icheon and Yongin. The BOK itself acknowledged the limitation, noting that "the gains from the semiconductor boom are still concentrated in specific sectors such as large IT companies and in regions with a high share of semiconductor workers."

Even so, the BOK said it expects "consumption and investment to spill over to other sectors and regions with a time lag."

In August, the BOK raised its growth forecast for this year to 3.3 percent, up 0.7 percentage points from its previous projection of 2.6 percent, with roughly half of that revision — 0.35 percentage points — attributed to the semiconductor boom. For next year, the BOK projected growth of 2.9 percent and said the contributions of domestic demand and exports would become more balanced. The outlook rests on the assumption that income gains will translate into stronger consumption and employment next year, after exports and investment drove growth this year.

Asked about the reasoning behind its view that the domestic demand recovery would translate into upward price pressure from the demand side, the BOK said such pressure "can be assessed through the GDP gap rate," adding that the sharp upward revision to the growth forecast means "the point at which the GDP gap rate turns positive is expected to be brought forward." It did not provide a specific timeline or figure for when that shift would occur.

The GDP gap rate measures the difference between actual GDP and potential GDP as a proportion of potential GDP. A positive reading indicates that demand is outpacing the economy's supply capacity, which can intensify upward pressure on prices. Bank of Korea Governor Shin Hyun-song said at a press briefing following the August monetary policy decision that while the GDP gap rate had originally been expected to turn positive next year, "the timing could now be brought forward considerably."

The BOK withheld its assessment of the government's expansionary fiscal stance, which is underpinned by semiconductor-driven tax revenues. In response to concerns that ramping up fiscal spending amid heavy semiconductor concentration could cause the national debt burden to surge sharply once the cycle ends, the BOK said it was "difficult to assess" the matter given that "the specific details of government spending have not been finalized and there is significant uncertainty about the duration of the semiconductor cycle and the trajectory of tax revenues thereafter." It added that assessing the impact of fiscal spending on the national debt requires considering "the nature of the expenditure and the sustainability of its funding sources."

On whether using surplus tax revenues for spending rather than debt repayment would affect medium- to long-term fiscal soundness, the BOK said the impact "varies greatly depending on domestic and international economic conditions and how the surplus revenues are used," and that "if directed toward productivity improvements and expanding growth drivers, it could raise potential growth and contribute to improving fiscal soundness." Governor Shin made a similar point at the August briefing, saying that if fiscal spending is "applied to investment that can lift future growth, it could raise potential growth without working at cross-purposes" with monetary policy.

Even so, when asked whether the government's budget proposal for next year allocates spending appropriately by that standard, the BOK said it was "difficult to evaluate the budget proposal given that its specific details have not been finalized."

The government approved the 2027 budget proposal at a Cabinet meeting on Sept. 1. Total expenditure is set at 820.9 trillion won ($604 billion), up 93 trillion won, or 12.8 percent, from this year's original budget of 727.9 trillion won — the largest increase on record. Of the total, 21.3 trillion won is earmarked for support of three mega-projects in semiconductors, AI and physical AI, while 62.8 trillion won is allocated to expanding future growth engines including advanced strategic industries.

On Sept. 9, global credit rating agency Fitch projected that South Korea's fiscal indicators would improve next year on the back of a surge in tax revenues driven by semiconductors, but warned the effect could be temporary. Because the revenue increase is concentrated in a handful of industries, a slowdown in earnings at those companies could cause the fiscal deficit to gradually widen, Fitch said.