Gross fixed capital formation (total investment), an investment indicator that shows Korea's future production capacity, fell for five consecutive quarters for the first time since the foreign exchange crisis. The decline stopped with a slight rebound in the third quarter, but the investment scale is the smallest in about five years. In particular, a prolonged slump in construction investment is weighing on the growth engine.
◇ Total investment falls for five straight quarters… first time since the foreign exchange crisis
According to the Bank of Korea's Economic Statistics System (ECOS) on the 8th, real gross fixed capital formation (based on 2020 prices, seasonally adjusted) declined for five consecutive quarters from the second quarter of last year (-1.9%) to the second quarter of this year (-1.0%), then barely rebounded in the third quarter, up 0.8%. Since statistics began in 1960, this is the first time total investment has fallen for five straight quarters after the foreign exchange crisis (from the third quarter of 1997 to the third quarter of 1998).
The scale itself has also retreated to the level of five years ago. The total investment amount, which was 164.5694 trillion won in the second quarter of last year, fell to 159.7803 trillion won in the third quarter of this year. This is similar to the level of the third quarter of 2020 (159.7773 trillion won).
Gross fixed capital formation is the sum of facility investment, construction investment, and research and development investment, and it is an indicator that shows how much corporations and the government are investing to expand future production capacity. A decline in this figure means the economy's long-term growth potential is decreasing.
This trend contrasts with advanced economies. According to the World Bank (WB), the United States has seen total investment increase every year over the past decade except 2020 (-3.0%). Japan decreased for three years from 2020 (-3.6%) and then turned to an increase in 2023 (+1.8%). The European Union (EU) also steadily increased except for 2020 (-5.7%).
The biggest reason is weak construction investment. In the third quarter of this year, construction investment (in real terms) fell 0.1% from the previous quarter to 65.3855 trillion won, declining for six consecutive quarters since the second quarter of last year (73.9663 trillion won, -3.3%). In terms of scale, it is the smallest in about 11 years since the fourth quarter of 2014 (63.4377 trillion won). In contrast, during the same period, facility investment and investment in intellectual property products have continued to rise with fluctuations.
Cho Yong-gu, a Shinyoung Securities researcher, said, "Construction investment continues to suffer a prolonged slump as internal factors such as restructuring due to past overinvestment and delays in fiscal execution due to martial law at the end of last year have overlapped," adding, "With the conclusion of the Korea-U.S. tariff negotiations, it will be better than before, but with much of the investment going overseas, expanding domestic investment could be limited."
◇ As total investment growth rate slows… potential growth rate also declines
This trend is expected to act as a constraint on the recovery of total investment going forward. The National Assembly Budget Office projected that the total investment growth rate will rise from -2.3% this year to 2.7% next year, then slow to 2.23% in 2027, 2.25% in 2028, and 2.23% in 2029.
Weak investment is expected to lower the contribution of capital to growth and pull down the potential growth rate. The budget office expected the capital contribution to GDP growth, which was 0.9 percentage points last year, to fall to 0.8 percentage points this year and remain at that level through 2029. The potential growth rate is also projected to decline from 1.9% this year to around 1.8% in 2026–2029.
Experts advise that government measures are needed to prevent a prolonged slump in construction investment. Lee Ji-hye, a research fellow at the Korea Research Institute for Construction Policy (CERIK), noted at the "Construction·Materials·Real Estate Market Outlook Seminar" held earlier this month that the weakness in construction investment is becoming structurally entrenched, and said, "In the short term, accelerating the execution of public orders and promoting groundbreakings for private projects are essential, and in the mid to long term, a transformation in fundamentals is vital, including future infrastructure investment, innovation of the industrial ecosystem, and internalization of technology."
There is also criticism that the structure of construction investment, which has had a weak link to productivity, needs improvement. Lee Yun-su, an economics professor at Sogang University, said, "The Korean economy has a high concentration of construction investment related to (residential) real estate, so capital is not being used productively," adding, "We should consider ways to expand construction investment that supports economic vitality, such as facilities related to artificial intelligence (AI) or the development of industrial complexes."