The Korea Development Institute (KDI), a state-run research body, raised its forecast for Korea's economic growth this year by 0.1 percentage point to 1.9% from 1.8%. It lifted the outlook, expecting the "semiconductor effect" to be stronger than when it first projected this year's growth three months ago.
KDI said on the 11th in its "revised economic outlook" that "our economy is expected to grow about 1.9%, higher than 2025 (1%), on the back of strong semiconductor exports and a recovery in consumption."
By component of the growth rate, KDI first raised this year's total export growth rate to 2.1% from 1.3% projected three months ago, up 0.8 percentage point. Jeong Gyu-cheol, Deputy Minister and head of KDI's economic outlook office, said, "With rising expectations for artificial intelligence (AI) and increasing demand for semiconductors, semiconductor prices have risen significantly," adding, "This will have a large direct impact on exports."
The upturn in the semiconductor cycle is expected to have a positive impact not only on exports but also on facility investment and consumption. KDI raised its forecast for the private consumption growth rate to 1.7% from 1.6% and its forecast for facility investment to 2.4% from 2.0%. Deputy Minister Jeong said, "When demand for semiconductors increases, corporations expand facility investment," adding, "The favorable semiconductor cycle also appears likely to improve income flows."
However, it expects the construction investment institutional sector to grow 0.5%, sharply lower than the previous forecast (2.2%). Although construction orders are improving, the sluggish real estate market in the provinces continues, which means this is not translating into actual groundbreakings. Deputy Minister Jeong said, "Normally, once orders are won, projects break ground after a time lag, but that past pattern is not operating," adding, "Construction periods are being extended much longer than before, and the farther you go into regions affected by population decline, the stronger this trend becomes."
Buoyed by this semiconductor cycle, KDI also projected that this year's current account surplus will surpass last year's level. It forecast a $148.8 billion surplus in the current account, larger than last year's $123.1 billion surplus. That is $45.1 billion higher than the projection three months ago ($103.7 billion surplus).
KDI cited the United States, AI, and the exchange rate as risk factors for the outlook. KDI said, "Uncertainty remains high over U.S. reciprocal tariffs and tariffs on electronic products such as semiconductors," adding, "If high tariffs are imposed going forward, they will act as downward pressure on our exports." It also said, "If expectations for AI are adjusted and semiconductor demand contracts, the recovery of our economy could be constrained."
The exchange rate is a factor threatening prices. KDI raised its forecast for this year's average won-dollar exchange rate to 1,456 won from 1,423 won three months ago. Deputy Minister Jeong said, "If the exchange rate moves to a somewhat higher level than expected, there is a possibility that inflation will exceed the 2% price stability target," adding, "However, we are not greatly concerned yet." KDI projected this year's consumer price and core inflation growth rates at 2.1% and 2.3%, respectively.
Meanwhile, the revised KDI forecast for this year is higher than the Bank of Korea's forecast (1.8%) and lower than the government's (2.0%). The private sector is more optimistic. The average growth rate forecast presented at the end of January by eight major investment banks (IB) was 2.1%. In particular, Citi projected as high as 2.4%.