Economic Growth Forecast Rises to 2.8% Amid Semiconductor Boom

Thanks to strong semiconductor exports and the government's expansionary fiscal policy, market experts have raised their economic growth forecast for this year to as high as 2.8%. However, the ongoing war in the Middle East, high oil prices, and market interest rate instability have been identified as significant variables affecting the South Korean economy.

A survey conducted by Aju Economy on May 21 among eight leading bond and macroeconomic experts revealed that three of the seven respondents projected the country’s GDP growth rate at 2.8% for this year. Another three estimated it at 2.5%, while one expert anticipated a growth rate of 2.6%.

These figures significantly exceed the Bank of Korea's previous forecasts, which estimated a growth rate of 2.0% for this year and 1.8% for next year in its economic outlook released in February.

The recovery in exports, particularly in the semiconductor sector, has been stronger than expected, shifting the economic outlook. The growth rate for the first quarter of this year was recorded at 1.7%, well above the Bank of Korea's forecast of 0.9%. Subsequent industrial activity reports also indicated an overall improvement in production, consumption, and investment metrics, suggesting that robust growth may continue into the second quarter.

Experts commonly cited the semiconductor supercycle and the government's fiscal expansion as key factors driving the upward revision of growth forecasts. Jo Yong-gu, a researcher at Shin Young Securities, stated, "The strong performance of semiconductor exports due to increased investment in artificial intelligence (AI) has exceeded expectations, and the government's supplementary budget and expansionary fiscal policies are supporting domestic demand and investment recovery. The increase in foreign tourists is also a positive factor for service consumption."

Kim Sung-soo, a researcher at Hanwha Investment & Securities, projected a growth rate of 2.5% for this year and 2.2% for next year, noting, "The prolonged war in the Middle East poses the biggest downside risk, but the strong semiconductor market and government fiscal policies will likely boost growth rates."

Concerns about inflationary pressures remain. Experts expect the consumer price inflation rate to reach between 2.6% and 2.7% this year. Upside risks include rising international oil prices due to the Middle East conflict and the strong semiconductor market, while downside factors include government measures aimed at stabilizing prices.

Woo Hye-young, a researcher at LS Securities, remarked, "Even if there are no further increases in international oil prices in May and June, we anticipate a period of rising inflation rates. Particularly in terms of service prices, the impact of rising fuel surcharges and energy costs is contributing to ongoing inflationary pressures."

Experts have assessed the recent fluctuations in the won-dollar exchange rate, which has hovered around 1,500 won, as an excessive depreciation of the won compared to fundamentals. They projected the upper limit for the exchange rate this year at 1,550 won and the lower limit at 1,380 won.

Park Sang-hyun, a researcher at iM Securities, stated, "The exchange rate in the 1,500 won range reflects a significant undervaluation of the won against fundamentals. While there is potential for further increases if international oil prices rise, the exchange rate could quickly drop to the mid-1,400 won range if oil prices stabilize and geopolitical risks ease. Furthermore, the current account balance is expected to be much better than last year, which could also contribute to a stronger won in terms of foreign exchange supply and demand."

Concerns have also been raised about the recent surge in government bond yields, with analysts warning of the potential for further increases. This is attributed to inflationary pressures from geopolitical risks, the government's expansionary fiscal stance, and concerns over U.S. interest rate hikes.

Kang Seung-won, a researcher at NH Investment & Securities, noted, "The recent rise in government bond yields reflects concerns about inflation, expectations for expansionary fiscal policies next year, and the possibility of U.S. interest rate hikes, all contributing to widespread upward pressure. The market has already begun to factor in additional interest rate hikes this year, and there is a prevailing sentiment that further increases may occur two or three more times."