Korea's economy is posting high growth on the back of unprecedentedly strong semiconductor exports, but a forecast warned that side effects such as rising consumer prices, polarization, and expanded leveraged investment in real estate could emerge alongside it.
◇ Double whammy of increased consumption and crude topping $100
The Bank of Korea released its Monetary and Credit Policy Report on the 10th, saying, "The sharp rise in the nominal growth rate will boost consumption and investment," and "Through wage increases and other factors, it is expected to act as a factor raising demand-side price pressures." Thanks to the "semiconductor supercycle," increased income for corporations and households is flowing into consumption and investment, pushing up prices. In the first half of this year, Korea's nominal gross domestic product (GDP) grew 22% from a year earlier. It is the first time since the early 1990s that nominal GDP has exceeded 20%.
The Bank of Korea also analyzed that prices rose during the 2016–2017 expansion in semiconductor exports. The Bank of Korea said, "Wages in the IT sector rose considerably at the time," adding, "With a lag of about three months, it spread to service wages, and influenced by this, the upward trend in service prices widened."
In particular, recently surging global crude prices due to worsening conditions in the Middle East are also stoking inflation. There is a possibility that "supply-side pressures" from higher oil and "demand-side pressures" from rising incomes will appear simultaneously. Brent futures, the benchmark for global crude, settled at $101.21 on the 9th local time, topping $100 for the first time since July 23.
Park Jong-woo, a deputy governor at the Bank of Korea, said, "Because the risk of war in the Middle East has increased again, it will have negative effects on both economic growth and prices," but noted, "The impact will be larger on prices than on growth."
◇ "If increased income goes to the asset market, household liability risks will grow"
The Bank of Korea also viewed as a side effect the possibility that wage hikes and large performance bonuses for employees at major semiconductor companies could drive up apartment prices. If expectations grow that apartment prices will rise, leverage through borrowing to invest will expand, increasing household liability risks. As of January, Korea's "household liability-to-GDP ratio" was 85.3%. As of October last year, it remained higher than the United States (68.1%), the United Kingdom (73.6%), and Germany (48.9%).
The Bank of Korea said, "Instability in the housing market is continuing due to a shortage of move-in supply and fewer jeonsei and wolse listings," adding, "Large performance bonuses at semiconductor corporations could lead to increased demand to buy dwellings in core beneficiary regions for semiconductors and nearby areas, potentially exerting additional upward pressure on housing prices."
Concerns were also raised that polarization could emerge if the semiconductor effect concentrates only on employees at major companies. The Bank of Korea said, "As improvements in income and business conditions concentrate in leading manufacturing, such as the IT sector, we should also note that polarization between the corporations and household institutional sectors could intensify."