Semiconductor Boom Improves Trade Conditions, Central Bank Says

The semiconductor boom driven by the spread of artificial intelligence (AI) has significantly improved South Korea's trade conditions and is emerging as a key driver of domestic economic recovery. However, experts suggest that the growth concentrated in the semiconductor sector and among high-income groups necessitates policy efforts to broaden its benefits across the economy.

According to the Bank of Korea's 'BOK Issue Note: The Impact of the Semiconductor Boom on the Real Economy,' published on July 19, the recent improvement in trade conditions has been primarily driven by rising export prices due to strong semiconductor prices, rather than a decline in international oil prices as seen in the past. The bank anticipates that this improvement will support domestic recovery for an extended period.

Thanks to the semiconductor industry's strong performance, South Korea's gross domestic product (GDP) grew by 3.8% in the first quarter of this year compared to the same period last year. The increase in semiconductor prices led to a significant improvement in trade conditions, with gross domestic income (GDI) rising by 13.2%, outpacing GDP growth.

This current expansion in the semiconductor sector is expected to be more sustainable than in the past, as it is driven by structural demand increases linked to AI rather than short-term supply factors. The Bank of Korea predicts that favorable trade conditions will persist for a considerable time, continuing to boost GDI growth.

The impact on domestic consumption is also expected to differ from previous trends. In the past, improvements in trade conditions due to falling oil prices were perceived as temporary income boosts. In contrast, the current structural demand centered on semiconductors is expected to lead to sustained income growth through rising export prices and improved trade conditions. Additionally, the wealth effect from rising stock prices may further strengthen the recovery in consumption.

Investment patterns are also anticipated to change. Previously, cost savings from falling oil prices would take time to translate into investment. However, this time, there is a strong likelihood of rapid investment expansion, particularly among semiconductor companies. The Bank of Korea believes that if the stability of international oil prices aligns with the spread of AI and a reduction in geopolitical risks, the scale and sustainability of the shock from improved trade conditions will be greater than in the past, leading to an expanded impact on domestic consumption.

However, the concentration of benefits from the current improvement in trade conditions in the IT sector and among high-income and high-asset groups is seen as a limiting factor for domestic spillover effects. Wage increases and capital gains have been concentrated among lower marginal propensity to consume groups, while most industries outside of IT are expected to face sluggish investment due to poor business conditions and rising costs from geopolitical risks. The semiconductor industry itself is also noted for its relatively low production and employment effects, along with high dependence on imported manufacturing equipment and increased foreign direct investment in response to global supply chain restructuring, which further constrains domestic spread.

Kim Da-ae, head of the Bank of Korea's research team, stated, "The current semiconductor boom and the significant improvement in trade conditions will be key drivers supporting future domestic growth. However, since the benefits are concentrated in certain industries and groups, how macroeconomic outcomes are utilized could alter the long-term growth trajectory."

She added, "It is essential to make policy efforts to expand the benefits across the economy while strengthening the foundation of the domestic semiconductor industry ecosystem to maintain and enhance global competitiveness, especially as the IT-led growth trend is expected to continue for a considerable time."