The Korea Development Institute (KDI) has assessed that the domestic economy continues to show robust growth, driven primarily by investments in artificial intelligence (AI) infrastructure and the semiconductor sector. The positive momentum in exports and facility investments is spreading beyond semiconductors to include electrical equipment and steel, contributing to economic growth. However, the effects of high oil prices and interest rate burdens are slowing the pace at which economic improvements are translating into household income and consumption.
In its 'November Economic Trends' report released on November 9, KDI noted that the domestic economy is maintaining healthy growth, particularly in sectors related to AI infrastructure investment. Supported by strong external demand, semiconductor production and investment continue to rise sharply, while industries related to AI infrastructure, such as electronics and non-ferrous metals, are also showing signs of improvement. Consequently, the real gross domestic product (GDP) for the third quarter increased by 3.4% compared to the same period last year.
Production indicators also showed positive trends. In September, total industrial production rose by 1.1% year-on-year, although the growth rate was lower than the previous month's 2.3% due to a reduction of 2.5 working days during the Chuseok holiday. Seasonally adjusted, production increased by 3.0% compared to the previous month. Manufacturing output grew by 1.2%, driven by semiconductors (10.3%) and machinery (17.9%), reversing a 1.7% decline from the previous month. The average manufacturing capacity utilization rate rose from 71.2% to 76.8%.
Facility investment maintained a strong growth trajectory, particularly in AI infrastructure-related sectors. In September, facility investment increased by 10.1% year-on-year, with investments in semiconductor manufacturing equipment surging by 68.9%. Investments in general industrial machinery and electrical and electronic equipment rose by 15.2% and 9.9%, respectively. The import growth rate for semiconductor manufacturing equipment in October reached 59.1%, indicating that related investments are likely to continue in the near term.
Exports also continued to rise sharply, fueled by increased global AI investments. In October, exports grew by 93.7% year-on-year, with daily average exports increasing by 76.1%. On a daily average basis, semiconductor exports surged by 226.8%, while computer exports skyrocketed by 442.3%. Other items related to AI data center construction, such as steel products (11.2%), non-ferrous metals (25.2%), and electrical equipment (58.2%), also recorded strong growth rates. The trade balance showed a surplus of $42.5 billion as export growth outpaced imports.
However, the economic improvements driven by exports and investments have not sufficiently translated into consumer spending. KDI remarked, "The pace at which the effects of economic improvement are spreading to households remains slow, with consumer recovery showing only modest signs of progress."
In fact, the growth rate of private consumption in the third quarter was only 1.1%, a significant slowdown from 2.4% in the second quarter. The retail sales index in September also decreased by 0.4% compared to the same month last year. Notably, durable goods sales fell by 10.8%, and semi-durable goods decreased by 0.8%. Seasonally adjusted retail sales increased by 3.6% compared to the previous month, partially recovering from the sluggish performance in July and August, but still fell short of June levels by 0.9%.
High oil prices and interest rate burdens have been identified as obstacles to consumer recovery. The income gains from the semiconductor boom have not yet spread broadly across households, while rising international oil prices and previous increases in market interest rates are constraining consumer spending capacity.
Construction investment weakness appears to be easing somewhat. In September, construction output decreased by 1.6% year-on-year, but seasonally adjusted output increased by 5.8% compared to the previous month. Residential construction fell by 8.8% due to sluggish housing markets in rural areas, while non-residential construction rose by 6.1%. KDI noted that private orders for factories and warehouses, particularly for semiconductor plants, are maintaining strong growth, suggesting that improvements in non-residential construction may continue.
The job market is also showing signs of recovery, particularly in manufacturing and regular employment. In September, the number of employed persons increased by 113,000 compared to the same month last year. Employment in manufacturing shifted from a decrease of 38,000 in the previous month to an increase of 16,000, while the increase in regular employment expanded from 180,000 to 253,000. However, employment in the construction sector fell by 48,000, and the accommodation and food service sectors saw a decline of 97,000, highlighting disparities across industries.
Inflationary pressures remain high. The consumer price index rose by 2.8% in October, similar to the previous month's 2.9%. Prices for agricultural, livestock, and fishery products fell by 1.7%, but petroleum prices surged by 14.9%, and the increase in processed food prices rose from 2.1% to 2.9%. Core inflation also remained steady at 2.8%. The rising prices of semiconductors contributed to a 10.8% increase in mobile phone prices, adding to inflationary pressures on major IT products.
The financial market experienced significant stock declines but maintained overall stability. In October, the KOSPI index fell by 16.2% compared to the end of the previous month, influenced by geopolitical risks in the Middle East and concerns over AI investment profitability. Conversely, the yield on three-year government bonds decreased from 4.01% to 3.72%, and the won-dollar exchange rate fell from 1,352.8 won to 1,334.3 won.
KDI identified ongoing conflicts in the Middle East and increasing policy uncertainties in major countries as external risk factors. While the expansion of global AI infrastructure investment supports exports and facility investments, the persistent cost burdens from high oil prices and delays in consumer recovery remain significant challenges for spreading the benefits of economic improvement across households.
* This article has been translated by AI.
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