Semiconductor Boom Widens South Korea's GDP-GDI Gap to Record High; Consumption, Investment Expected to Rise

South Korea's real gross national income (GDI) surged by 13.2% in the first quarter, significantly outpacing the 3.8% growth in gross domestic product (GDP). This divergence created a record 9.4 percentage point gap between the two indicators, largely propelled by a booming semiconductor market.

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In the second quarter, the terms of trade index showed improvement due to semiconductor prices rising more than oil prices, even as oil prices increased. Even if Middle East tensions ease and oil prices stabilize downwards, semiconductor price increases are expected to surpass them, so the trend of improving terms of trade will continue.

The Bank of Korea identified the primary driver as an improvement in the terms of trade, stemming from increased export prices, particularly for semiconductors. Unlike previous periods where falling import prices, like oil, fueled this improvement, the current trend is led by rising export prices. The IT sector's contribution to export price increases reached 73.4% in the first quarter, with semiconductor prices alone jumping 92.5% year-on-year.

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This time, because export prices are leading, corporate profits will increase immediately, and investment will occur without delay. However, consumption can only be felt when wages rise, so there is a time lag.

This export-driven improvement is anticipated to have a more substantial impact on domestic consumption and investment compared to past trends. The central bank noted that when export prices lead, businesses see immediate profit increases, stimulating investment. While consumption may lag due to the need for wage growth, the structural and long-term nature of AI-driven semiconductor demand could foster a perception of improved income conditions, potentially boosting spending.

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Demand is exceeding supply due to the slow pace of expanding production facilities relative to the increase in demand. We do not expect prices to peak and fall sharply in a short period.

However, the Bank of Korea also highlighted potential risks. The concentration of benefits within the IT sector could limit broader economic spillover effects, as wage increases and capital gains might accrue to high-income earners. Furthermore, a surge in semiconductor profits could lead to inflows into non-productive assets like real estate, potentially exacerbating financial imbalances and inflationary pressures. The reliance on imported manufacturing equipment for the semiconductor industry also tempers its domestic economic impact.

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If the benefits of the semiconductor boom flow into non-productive sectors like real estate rather than productive investment, financial imbalances could widen. We must also be mindful that the impact of improved terms of trade could act as upward pressure on demand, particularly for non-tradable goods like services.