Driven by a semiconductor boom, South Korea's nominal growth rate has surged unusually high, with positive effects expected to spread across the economy, including improved corporate performance, increased investment, higher tax revenue, and enhanced household income. However, there are concerns that rising incomes may lead to increased consumer spending, heightening demand-side inflation pressures and stimulating housing demand and household debt, which could exacerbate financial imbalances.
The Bank of Korea reported on September 10 that the nominal growth rate for the first half of this year exceeded 20%, indicating an unusual expansion. This surge in nominal growth is attributed to improvements in trade conditions driven by rising export prices. In the second quarter, nominal GDP increased by 9.2% from the previous quarter and rose 26.4% compared to the same period last year, marking the highest level since the third quarter of 1979 (27.7%).
Improved trade conditions are leading to increased corporate profits. The Bank of Korea noted that not only the information technology sector but also other manufacturing industries, such as shipbuilding and machinery, have seen profitability improvements, resulting in a significant increase in capital investment. The central bank anticipates that this trend will continue into next year, sustaining high growth in capital investment.
Corporate performance improvements are expected to have a ripple effect on the government and households. Thanks to strong corporate results, national tax revenue in the first half of this year has significantly increased compared to last year, and the Bank of Korea predicts that tax revenue will continue to rise next year, enhancing the government's fiscal capacity. Households are also expected to see gradual improvements in income conditions, leading to increased consumption capacity.
Considering these trends, the surge in nominal growth is expected to contribute to robust economic growth through expanded investment, rising wages, and increased tax revenue.
However, rising incomes do not necessarily guarantee economic recovery. The Bank of Korea forecasts that demand-side pressures will gradually increase, causing inflation rates to exceed target levels for an extended period. In particular, as increased income translates more into private consumption rather than savings or asset acquisition, inflationary pressures may intensify.
There are also potential burdens on the financial market. While the increase in nominal GDP may lower the household debt ratio relative to GDP, the Bank of Korea assesses that it remains high compared to major advanced countries. The improvement in income conditions could lead to increased housing demand, indicating that the need for household debt management remains significant.
In a context of high expectations for rising asset prices, the Bank of Korea warned that expanded leverage and interactions in the asset market could heighten the risk of financial imbalances.
The Bank of Korea stated, "The surge in nominal growth is expected to have significant impacts not only on growth but also on inflation and financial stability across the macroeconomy, necessitating an effective policy mix."
* This article has been translated by AI.
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