Despite a boom in the semiconductor industry, the slow recovery of private consumption is attributed to a decline in household purchasing power due to rising international oil prices, which has outpaced the positive effects of strong semiconductor exports. Analysts predict that the benefits of the semiconductor boom will become more pronounced next year, leading to an improvement in consumer spending.
Consumer Spending Expected to Improve Next Year
The Korea Development Institute (KDI) reported on November 12 that the increase in semiconductor prices has had little impact on the growth rate of private consumption this year. In contrast, rising oil prices have lowered the consumption growth rate by 0.4 percentage points.
Next year, KDI estimates that the semiconductor boom will raise the consumption growth rate by 0.6 percentage points, while rising oil prices will reduce it by 0.2 percentage points. As semiconductor companies see increased profits, these gains are expected to translate into higher household incomes through wages and dividends, thereby boosting consumption. Meanwhile, international oil prices are expected to stabilize, reducing their negative impact on household purchasing power.
Recently, South Korea's economy has continued to grow rapidly, driven by a surge in semiconductor exports fueled by increased investment in artificial intelligence (AI) infrastructure. The average export price of semiconductors rose by 145.3% in the first three quarters of this year compared to the same period last year. This increase in export prices has improved trade conditions, significantly boosting both gross domestic product (GDP) and gross domestic income (GDI).
However, it takes considerable time for export booms to translate into household consumption. KDI's analysis of data from 2006 to the present indicates that when semiconductor prices rise by one standard deviation, private consumption begins to increase after four quarters and can rise by a maximum of 0.3% after seven to eight quarters.
KDI explains that the lag occurs because the increase in operating profits for semiconductor companies is transferred to household income through bonuses and dividends, and this expanded consumption then leads to income growth in other sectors. Conversely, when oil prices rise by one standard deviation, consumption decreases immediately after the shock, dropping by about 0.5% after three quarters.
In fact, since the outbreak of conflicts in the Middle East at the end of February this year, crude oil import prices have risen by 43.4% in the second quarter and 31.3% in the third quarter. The increase in international oil prices has quickly constrained household purchasing power, as it has been reflected in the prices of petroleum products and travel and airline services. With nominal wage growth stagnating and prices rising, real wages fell in the second quarter and remained low in the third quarter.
Need for Productivity Gains in Non-Semiconductor Sectors
KDI anticipates that the effects of increased consumption from the semiconductor boom will become more evident starting next year. However, given that the semiconductor industry is capital-intensive and has weak connections to the labor market, it may take longer for consumption recovery to spread throughout the economy.
Whether this consumption expansion will translate into actual improvements in domestic economic conditions remains uncertain. KDI notes that the more income generated in the semiconductor sector is spent in areas closely linked to domestic employment, such as hospitality, food services, and cultural activities, the greater the domestic ripple effect. However, if spending is concentrated on overseas travel or imported goods, the perceived economic improvement may be limited.
Future projections also carry uncertainties. While increased bonuses and dividends from major semiconductor companies could amplify consumption growth, prolonged conflicts in the Middle East, high market interest rates, and low wage growth in non-semiconductor sectors could hinder consumption recovery. Notably, this analysis may have only partially accounted for the price suppression effects of the maximum oil price system, potentially leading to an overestimation of the consumption decline due to rising oil prices.
KDI assesses that since consumption improvement is expected to expand next year, there is less need for additional demand-boosting policies targeting the overall economy. Instead, it emphasizes the necessity for structural responses to spread the income improvement effects concentrated in the semiconductor sector to other industries.
Kim Ji-yeon, a research fellow at KDI's Economic Outlook Division, stated, "Rather than inducing short-term increases in consumer spending, we should focus on improving employment and income conditions to strengthen the foundation for sustainable consumption recovery. It is essential to enhance productivity in non-semiconductor sectors to improve employment and wage conditions."
* This article has been translated by AI.
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