The government has injected over 30 trillion won in supplementary budget, but a national research institute's evaluation noted that it failed to lift the economic growth rate. The Korea Development Institute (KDI) presented Korea's economic growth rate for this year as 0.8% in its revised economic outlook released on the 12th, the same as the forecast issued three months ago in May. Although the government of Lee Jae-myung, which took office after the May KDI forecast, prepared a second supplementary budget to stimulate the economy, the growth rate forecast remained stagnant. The sluggish construction industry hindered progress.
According to KDI, Korea's economy performed well in exports during the first half of the year despite general uncertainties, thanks to strong semiconductor market conditions. Consumption is also showing signs of recovery due to interest rate cuts and the effects of the supplementary budget. However, the unprecedented slump in the construction industry has led to a sharp decline in construction investment.
In terms of growth contribution, it is estimated that exports contributed 0.3 percentage points (p) and consumption added 0.1 p to the growth rate. However, the impact of the construction industry's slump reduced the growth rate forecast by 0.4 p, offsetting growth gains. If the construction investment situation had merely maintained the level of the May forecast, the growth rate could have been adjusted upward to 1.2%.
◇ How bad is the construction investment situation?
According to the Statistics Korea industrial activity trend, construction investment has recorded negative growth for 14 consecutive months from April of last year until June of this year compared to the same month of the previous year.
In particular, from January to June this year, the first half showed a double-digit decline rate. In terms of quarters, it dropped by 20.6% in the first quarter compared to the same period last year and declined by 17.1% in the second quarter.
Reflecting this first-half performance, KDI predicts that construction investment will decrease by 8.1% compared to the same period last year. KDI analyzed that the subdued construction orders during the period of high interest rates are being reflected in investment performance, and the normalization of the real estate project financing (PF) market is also delayed, making it difficult to improve the construction industry's conditions.
Recent government tightening of real estate loan regulations and the impact of construction site safety accidents have also led to project suspensions. Delays in construction progress at sites have made it difficult for construction companies with deteriorating financial soundness to start new projects.
Jeong Gyu-cheol, head of the KDI Economic Outlook Division, said, "It is quite unusual to see a construction investment rate of -8% in an economy where the growth rate is around 1%" and described it as "a significant drop uncommon in Korea's economy." He explained that there were cases of project suspensions due to safety accidents during the first half, and these factors have been reflected in adjusting downward construction investment.
The problem is that it is challenging to find a way out of this construction market slump. While it is possible to increase local construction investments for regional balanced development, there is insufficient demand in those areas. In contrast, the capital region is enforcing strict loan regulations to stabilize the real estate market. Additionally, securing land for supply expansion is not easy.
◇ Effects of the second supplementary budget on growth rate
According to the Bank of Korea, Korea's real gross domestic product (GDP) last year was approximately 2292 trillion won. The size of the second supplementary budget, confirmed at 30.5 trillion won, exceeds 1% of GDP. The net spending amount, excluding revenue adjustments, is 15 trillion won, and the Bank of Korea and major investment banks estimate that the second supplementary budget will lift the growth rate by 0.1 to 0.2 percentage points.
KDI also acknowledged that while consumption has partially revived due to the effects of the supplementary budget, the impact was not as significant as expected. The Deputy Minister noted, "Not all of the additional amount disbursed leads to increased consumption," adding that "over the year, the supplementary budget is expected to adjust the growth rate upwards by about 0.1 p." He further remarked, "While the size of the supplementary budget was much greater than 0.1% of GDP, not everything translated into additional expenditure."
The key projects of the second supplementary budget, such as cash support for livelihood recovery, have led to a 'substitution effect' where they replace essential consumption that households previously spent from their income, thus limiting the overall expansion of consumption. This means that not all increased disposable income from the support has been spent on consumption.
The slow recovery of private consumption can be attributed not only to the supplementary budget but also to the effects of declining interest rates and improved consumer sentiment. However, challenges such as price pressures, employment insecurity, and repayment liabilities continue to slow the recovery process. KDI assessed that "the effects of falling interest rates and consumption stimulus measures will moderate in the second half, but the consumption growth rate remains low."
◇ Exports under pressure from Trump… Uncertainties in trade continue
KDI presented an export growth rate forecast of 2.1% for this year, mainly due to the strong semiconductor market and the proactive shipment effect during the first half of the year. Three months ago, the forecast was merely 0.3%.
KDI pointed to the improvement in the semiconductor market and the larger-than-expected proactive export effects as reasons for the optimistic export outlook.
KDI, however, noted that the effects of the conclusion of the Korea-U.S. trade negotiations at the end of July were not significant. Kim Ji-yeon, head of KDI's Economic Outlook Division, stated, "While the reduction in uncertainties due to tariff negotiations is a positive development, this has already been reflected in the May forecast," adding, "Although tariffs on certain items like steel and aluminum have increased, the maintenance of zero tariffs on ICT products and the reduction of tariffs on automobiles has offset this, resulting in no significant change in the average tariff rate."
Trade uncertainties are mentioned as a factor of instability for Korea's economy moving forward. KDI pointed out that if trade conflicts between the U.S. and major countries escalate, it could affect Korea as well.
In particular, the semiconductor sector is facing significant uncertainty as the U.S. has mentioned plans for item-specific tariffs. KDI warned that if the U.S. does impose item-specific tariffs on semiconductors, it could severely restrict the supply of intermediate goods to major trading partners like Taiwan and ASEAN, leading to considerable ripple effects.
As KDI freezes its growth rate forecast, all eyes are on the upcoming economic outlook announcements by the Bank of Korea and the government this month. The government had projected a growth rate of 1.8% for Korea in its economic policy direction released in January, but a significant downward adjustment is inevitable. Nevertheless, there are also discussions regarding the possibility of presenting a figure of 'over 1%' to reflect both the symbolic nature of the first economic outlook from the new government and its policy commitment to enhancing the growth rate.