South Korea's Economy: Chip Boom Fuels Exports, But Domestic Demand Falters, Economists Warn

Despite a boom in the semiconductor industry driven by AI, South Korea's overall economy has yet to see significant spillover effects, according to Nomura Securities.

“

No one can deny that the semiconductor industry is strong, and the stock market has naturally taken off with it, but the key is whether this heat has flowed to other corners of the economy?

Economists at Nomura expressed skepticism about the "trickle-down effect" from the semiconductor sector and stock market into domestic demand. Senior economist Park Jeong-woo highlighted that while semiconductor exports have surged, this is largely due to price increases, with "shipment volume" growth not significantly exceeding historical averages. He pointed to a stark contrast in consumer spending, with luxury goods sales soaring while domestic car sales plummeted in May, indicating limited recovery in consumption.

Nomura forecasts South Korea's economic growth at 2.4% for the year, slightly below the Bank of Korea's official projection. Park stated that this figure is reasonable given the slow penetration of the boom into domestic demand, especially when market expectations were previously high. The firm also anticipates inflation to peak in August or September, driven more by supply-side shocks than demand.

“

The evidence that the prosperity of semiconductors and the stock market is translating into actual consumption is still minimal.

Despite these concerns, Nomura expects the Bank of Korea to raise interest rates in July, pushing the policy rate to 3.25%. The primary motivation, they argue, is not economic growth or inflation but collective anxiety over financial stability, including the fragile won exchange rate and the volatile real estate market. Nomura's foreign exchange team predicts the won will continue to depreciate against the dollar, with a rate of 1470 by year-end, making a strong rebound difficult.

“

2.4% is not an ugly number, but given that market expectations were previously too high, and the speed at which this strong momentum is penetrating domestic demand is too slow, we believe this growth rate is a reasonable estimate for this year.