Thanks to a booming semiconductor industry, South Korea's nominal growth rate exceeded 20% in the first half of the year, significantly improving income conditions for both businesses and households. The Bank of Korea warned that this income increase could support a recovery in investment and consumption while also raising demand-side inflation pressures and stimulating housing demand and borrowing, thereby increasing the risk of financial imbalance.
In its 'September Monetary and Credit Policy Report' released on the 10th, the Bank of Korea assessed that the country's nominal growth rate is showing an unusual expansion. In the first quarter of this year, nominal Gross Domestic Product (GDP) increased by 17.1% compared to the same period last year, while the second quarter saw a growth of 26.4%. Typically, the gap between real and nominal growth rates is not significant, but it has widened sharply this year.
Bank of Korea Deputy Governor Park Jong-woo described the current nominal income increase as the first of its kind since the high-growth period of the 1970s. He noted, 'The impact of the domestic economic environment on income is substantial, fundamentally changing our economy, making forecasts very challenging.'
Improvements in trade conditions are primarily leading to increased corporate profits, which will gradually spill over to the government and households. This year, not only the information technology (IT) sector but also other manufacturing industries, such as shipbuilding and machinery, have seen improved profitability, resulting in a significant increase in capital investment. This trend is expected to continue into next year, sustaining high growth rates in capital investment.
With national tax revenues significantly increasing in the first half of the year, further growth in tax revenues is anticipated next year, enhancing the government's fiscal capacity. Households are also expected to see gradual improvements in income conditions, leading to increased consumption capacity. The effects observed in related companies and regions may spread throughout the economy over time, through increased tax revenues and expanded consumption.
In fact, an analysis of card spending in the so-called 'semiconductor belt' areas, including Yongin, Hwaseong, and Pyeongtaek, revealed that cumulative consumption increased by approximately 1.1 trillion won from February of last year to June of this year. If this trend continues, it is projected to reach about 1.7 trillion won by the end of the year. The average annual increase from 2025 to 2026 is expected to be around 800 billion won, which corresponds to 2% of last year's total private consumption increase of 41.3 trillion won.
However, the surge in nominal growth rates and the resulting income increase do not solely bring positive effects to the economy. The Bank of Korea has indicated that demand-side pressures are gradually increasing, which could lead to inflation rates exceeding target levels for an extended period. In particular, how much of the increased income translates into private consumption rather than savings or asset acquisition will likely influence inflationary pressures.
The risks of financial imbalance surrounding the housing market and household debt may also grow. Despite stringent government lending regulations and total management by financial institutions, household loans have continued to rise this year. There are concerns about increased housing demand due to improved income conditions. Following the payment of performance bonuses, the average monthly purchase count in the Dongtan area has nearly doubled compared to the previous year. With high expectations for rising asset prices, the combination of increased borrowing and asset price inflation could exacerbate financial imbalance risks.
The sustainability of the semiconductor industry's growth, which is driving economic expansion, remains a key concern. Currently, the semiconductor sector is thriving due to increased global investment in artificial intelligence (AI), but this investment growth is expected to peak this year and gradually slow down. Major international institutions predict that the global AI investment growth rate will peak in 2026 (61-95%) before declining to 38-40% in 2027 and 13-21% in 2028.
Choi Chang-ho, head of the Bank of Korea's Monetary Policy Division, stated, 'Despite the rapid revenue growth of major AI companies, concerns about profitability remain, and the reliance on external funding by big tech firms is increasing. If financial conditions worsen and uncertainties about revenue generation grow, AI investments could slow down more quickly than expected. It is essential to continuously monitor related risk factors.'
* This article has been translated by AI.
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