The Korea Development Institute (KDI) has assessed that the domestic economy continues to improve, driven primarily by the artificial intelligence (AI) and semiconductor sectors. The report highlights significant increases in exports and facility investments as key factors in the economic recovery. However, it notes that this positive momentum has not sufficiently translated into household income and consumption.
In its 'September Economic Trends' report released on September 7, KDI stated, "Our economy is maintaining an improvement trend centered on sectors closely related to AI investment." Thanks to expanded domestic and international AI infrastructure investments, exports and facility investments in semiconductors have shown robust growth, and production in related manufacturing sectors, such as metal processing, electrical equipment, and machinery, has also remained relatively strong.
Production indicators have continued to show improvement. In July, total industrial production increased by 3.1% compared to the same month last year, surpassing the second quarter average of 2.9%. Manufacturing output rose by 3.6%, and the average utilization rate remained high at 74.9%. Production of machinery equipment increased by 9.6%, metal processing by 6.9%, and electrical equipment by 4.0%.
Facility investment, particularly in semiconductors, has shown a steep upward trend. In July, facility investment rose by 24.9% compared to the same month last year. Notably, investment in semiconductor manufacturing equipment surged by 66.0%, while investment in electrical and electronic devices increased by 11.0%. The growth rate of semiconductor manufacturing equipment imports also expanded to 96.5% in August, indicating that related investment is likely to remain strong for the time being.
Exports have also continued to thrive, bolstered by global demand for AI investments. In August, exports increased by 68.7% compared to the same month last year, with daily average exports rising by 72.5%. On a daily average basis, semiconductor exports skyrocketed by 216.1%, and computer exports surged by 431.2%. The increase in exports significantly outpaced imports, resulting in a trade surplus of $34.75 billion.
However, the economic improvement driven by exports and investments has not fully reached households. KDI remarked, "The economic recovery has not sufficiently permeated household income, leading to a gradual improvement in consumption."
In fact, the retail sales index in July decreased by 0.8% compared to the same month last year, reversing from a 3.9% increase the previous month. Sales of durable goods fell by 4.1%, with declines in automobiles (-2.5%), electronics (-0.8%), and communication devices and computers (-14.2%). The average retail sales growth rate for June and July, which smooths out monthly volatility, was only 1.5%, below the first quarter average of 3.2%.
The slow recovery of household purchasing power has been identified as a barrier to consumption recovery. The real wage growth rate for all workers in the first half of the year was just 0.3%. Production in the service sector also showed a slowdown, with the growth rate in wholesale and retail declining from 4.1% to 0.1%, and accommodation and food services dropping by 1.0%.
Construction investment has also continued to struggle. In July, construction output fell by 3.2%, with residential building activity down by 7.9%. Housing permits totaled 26,000 units, and new construction starts were at 20,000 units, both significantly below the 2021-2025 averages of 38,000 and 29,000 units, respectively. KDI predicts that the sluggishness in the housing sector and high construction costs will lead to a gradual recovery in overall construction investment.
While employment growth has somewhat eased, recovery among young people remains limited. In July, the number of employed individuals increased by 108,000 compared to the same month last year, with the growth rate expanding from the previous month. However, manufacturing employment decreased by 68,000. The employment rate for those in their 20s remained at 59.1%, the same as the previous month, while the unemployment rate rose by 0.5 percentage points.
Inflationary pressures also persist. The consumer price index rose by 3.1% in August, up from 2.8% the previous month. While the base effect from last year's communication fee discounts significantly influenced this increase, the core inflation rate, excluding communication fees, also exceeded the inflation stability target at 2.6%. Heightened instability in the Middle East has raised concerns about potential upward pressure on oil prices in the future.
KDI assesses that external uncertainties remain high, particularly regarding the situation in the Middle East and U.S. trade policies. While the economic recovery continues to be driven by exports and investments, the extent to which this recovery spreads to household income, consumption, construction, and youth employment will be crucial in determining future economic trends.
* This article has been translated by AI.
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