South Korea’s AI-driven semiconductor boom has not translated into broader economic strength, a Nomura economist reports. Despite stock market gains, domestic demand remains weak, making a Bank of Korea rate hike in July likely due to financial stability concerns.
The artificial intelligence-led semiconductor boom has yet to show a strong spillover into South Korea’s broader economy, even as currency and financial stability concerns make a Bank of Korea rate hike in July increasingly likely, Nomura’s senior economist said Friday.
Economic Disconnect and Domestic Demand
According to a report by The Korea Herald, Park Jeong-woo, South Korea and Taiwan senior economist at Nomura, said at the brokerage’s Korea Equities & Economy Media Briefing in Seoul that the key question for the economy is not whether chips and stocks are strong, but whether that strength is feeding into domestic demand.
“No one can deny the strength in semiconductors, and the stock market has been strong on the back of that,” Park said. “The key question is whether that strength is flowing into the rest of the economy.”
Park said the central bank appears to have shifted its tone since May, putting less emphasis on the K-shaped recovery and more on the expected trickle-down effect from the semiconductor upcycle. But Nomura remains unconvinced that the effect has become broad-based, the report added. “So far, the evidence that the warmth is spreading to domestic demand is not that strong,” he said.
Business Investment vs. Construction
The direct contribution from chips to gross domestic product also looks more limited than headline export figures suggest, Park said. Semiconductor exports have been driven heavily by price effects, while shipment volume growth has not been exceptional compared with historical averages. Business investment has been supported by chipmakers’ capital expenditure cycle and is likely to remain strong through the third quarter, he said. But the effect could fade afterward, while construction remains weak due to higher building costs and elevated interest rates.
Mixed Signals in Consumption
Consumption also shows a mixed picture. Park said department store card spending rose 17 per cent, far outpacing overall card spending growth of about 2.5 per cent, but the increase appears concentrated in luxury purchases. Domestic auto sales fell about 8 percent in May, pointing to limited signs of broader consumption strength.
“The evidence that the semiconductor and stock market boom is moving into consumption is still not very strong,” Park said.
Growth Forecast and Inflation Outlook
Nomura expects Korea’s economy to grow 2.4 per cent this year, below the Bank of Korea’s 2.6 per cent forecast but still above the country’s estimated potential growth rate of less than 2 per cent.
“Two-point-four per cent is not a weak number,” Park said. “But given the higher expectations and the limited speed at which the strength is spreading into domestic demand, we think it is an appropriate growth rate for this year.” On inflation, Park said Nomura views the current pressure more as a supply shock than demand-driven inflation. Employment and wage data do not yet show the kind of broad pressure seen in 2021 to 2023, he said, adding that inflation could peak around August or September.
Rate Hike and Financial Stability Concerns
Still, he said the BOK is likely to raise the policy rate in July, with Nomura expecting it to eventually reach 3.25 per cent. The move, he said, would be driven less by growth and inflation alone than by financial stability concerns, including the won and the housing market.
Park said the won is unlikely to strengthen to the 1,400-per-dollar level in the near term. Nomura’s foreign exchange team expects the won-dollar rate to be at 1,470 by year-end and 1,420 in 2027, but upward pressure is likely to persist for now.
“A 25-basis-point hike would not change the direction of the exchange rate,” he said, adding that, while a much larger move would be needed to have a decisive impact on the currency, such a scenario looks unlikely, given the burden higher rates would place on households and companies. (ANI)
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