SEOUL, February 02 (AJP) -A booming semiconductor cycle and a frothy equity rally have lifted sentiment around the Korean economy, but the apparent strength rests on an increasingly narrow base, leaving broader growth and domestic demand lagging behind.
Exports and stock prices are sending powerful bullish signals. Korea’s benchmark equity index surged to record territory in January, while outbound shipments continue with record-setting growth streak, fueling talk of a durable recovery.
Yet headline momentum obscures a deeper imbalance: growth is being pulled forward by a handful of capital-intensive industries, while large swaths of manufacturing, domestic demand and employment remain stuck in stagnation.
The divergence is most evident in international comparison. Korea’s real GDP growth rounded to 1.0 percent last year, among the weakest in Asia. Taiwan — also heavily exposed to semiconductors — expanded 8.63 percent, while China grew 5 percent, Singapore 4.8 percent, and Hong Kong 3.5 percent. Despite sharing a similar export profile with Taiwan, Korea has captured far less spillover into consumption, jobs and non-IT investment.
Exports remain strong. Shipments rose 3.8 percent last year to $709.4 billion, crossing the $700 billion mark for the first time. January exports surged 33.9 percent on year to $65.85 billion, reinforcing expectations of another strong annual performance.
But the rebound is highly concentrated. Semiconductor exports jumped 21.9 percent last year to $175.3 billion, riding a global chip supercycle amplified by artificial intelligence investment. Passenger car exports edged up 0.3 percent, while ship exports climbed 24 percent. The chip strength maintained over 20-percent growth in January.
Traditional manufacturing tells a different story. Steel exports fell 4.5 percent, petroleum products 9.4 percent, auto parts 6.5 percent, wireless communication devices 6.2 percent, and home appliances 17 percent, reflecting global oversupply, rising trade barriers and weakening downstream demand.
As a result, export dependence has deepened. Semiconductors accounted for 25 percent of total exports last year, up sharply from 16 percent in 2023. The top five export items — semiconductors, passenger cars, steel, petroleum products and ships — together made up 52 percent of total shipments, underscoring the growing concentration of Korea’s export engine.
Stock-market strength outpaces the real economy
Equity markets have amplified the sense of recovery. Chipmakers, shipbuilder and defense-related stocks have driven index gains, buoyed by strong earnings and optimistic forward guidance. But the rally has remained sector-specific, offering limited support to small manufacturers, service firms or regional economies.
Domestic demand remains subdued. Retail sales rose just 0.5 percent last year, with spending gains concentrated in automobiles and communication devices. Sales of clothing, cosmetics and other everyday goods declined, highlighting the disconnect between asset prices and household sentiment.
Industrial activity reflects the same split. Overall manufacturing output increased 1.6 percent, but total shipments were flat as domestic shipments fell 2.6 percent, offsetting export growth. The recovery is export-led, not consumption-led — a pattern that limits job creation and income growth.
A K-shaped economy hardens
The imbalance is becoming structural. Production at small and medium-sized manufacturers fell 3.3 percent last year, the steepest decline since records began a decade ago. Large manufacturers posted a 3.0 percent increase, pushing their output index to a record high.
Growth accounting underscores the distortion. Without the semiconductor boom, Korea’s growth rate would have fallen to around 0.4 percent. The IT sector contributed roughly 0.6 percentage points to growth, with semiconductors alone accounting for about 0.9 percentage points, offsetting sharp contractions elsewhere.
Construction investment dropped nearly 10 percent, shaving 1.4 percentage points off growth. Employment-intensive sectors such as construction, steel and petrochemicals continue to struggle, while job gains have been concentrated in services linked to aging demographics rather than productive investment.
Policy constraints come into focus
The chip-led surge leaves policymakers with limited tools. Broad monetary easing, the central bank argues, would do little to address sectoral polarization and could worsen asset and income inequality by further inflating stocks and property.
Instead, authorities are relying on targeted credit programs and industrial support for vulnerable sectors, while holding interest rates steady. The strategy reflects a growing consensus that Korea’s challenge is not cyclical weakness, but structural imbalance — one that interest rates alone cannot fix.
For now, booming chips and soaring stocks provide a powerful narrative of resilience. But the longer growth remains dependent on a narrow set of industries, the greater the risk that today’s recovery hardens into a prolonged K-shaped expansion — one that lifts markets but leaves jobs, incomes and domestic demand behind.
As AI and semiconductor investment accelerate, Korea faces a paradox: the industries driving growth are also those least capable of spreading it widely. Without a broader revival in traditional manufacturing and consumption, the gap between headline strength and economic reality is set to widen further.
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