Minister Park Sang-woo of the Ministry of Land, Infrastructure and Transport mentioned 'early fiscal execution' in his New Year's address this year, raising interest in whether construction investment can recover due to an increase in public orders. Once, construction investment accounted for half of the growth rate of the gross domestic product (GDP), but it has now become a factor that instead detracts from growth.
According to the Ministry of Land, Infrastructure and Transport on the 2nd, Minister Park Sang-woo noted in his New Year's address released on the 31st of last month that 'active early fiscal execution and bold deregulation must be pursued to reverse the recession in the construction industry, a national critical industry.' As the construction market is expected to remain low this year, it is interpreted as a strong request for stimulus from the minister of the responsible department.
The government and ruling party announced 'measures to revitalize domestic demand' last month, deciding to execute over 36 trillion won of the Ministry of Land, Infrastructure and Transport's budget of approximately 59 trillion won in the first half of the year. They plan to execute over 12 trillion won in budgets for social overhead capital (SOC) such as roads, railways, and airports in the first half, and to swiftly inject 11.7 trillion won in budgets for supporting vulnerable households.
As movements to stimulate the construction market emerge from the public sector, expectations are growing that the trend of improved construction orders may continue. According to Statistics Korea, the total amount of construction orders from January to November last year was 20.617 trillion won, an increase of 14.5% compared to the same period the previous year. The construction order indicator is considered a 'leading indicator' of the construction industry, taking more than a year to reflect actual construction investment. It was found that 75.3% (15.518 trillion won) of the increase in construction orders came from the public sector, including the government, local governments, public enterprises, and public institutions.
Construction investment, which once accounted for about half of Korea's gross domestic product (GDP) growth rate, is now eroding economic growth. According to the Bank of Korea, construction investment fell by 3.6% in the third quarter of last year compared to the previous quarter. The contribution to GDP growth rate was also -0.5 percentage points, indicating that the sluggishness in construction investment significantly impacted the growth rate that was only 0.1% in the third quarter. In 2016, when the economic growth rate was 2.9%, the contribution of construction investment was 1.4 percentage points, nearly half of it.
In the industry, voices are raised stressing the urgent need for public support as political uncertainty, a downturn in the housing market, and rising exchange rates may slow the recovery of the construction industry in the private sector. However, there are also concerns that there are limits to construction orders in the public sector, as the SOC budget has decreased by nearly 1 trillion won. This year's SOC budget is 25.5 trillion won, a reduction of 900 billion won compared to the previous year (26.4 trillion won).
Park Cheol-han, a research fellow at the Construction Industry Research Institute, noted, 'I cannot be sure how much public orders can increase with the reduction in the SOC budget,' and added, 'It is expected that recovery in the private sector will take time, so it is necessary to reflect this through a supplementary budget.'
Kim Min-hyung, a visiting professor at Chungang University's Graduate School of Construction, said, 'As the local construction market has worsened relatively, support should be provided centered around local governments through supplementary budgets,' and warned that 'if recovery in the public sector is also insufficient, construction investment may worsen further than it is now.'