The South Korean economy could face a complex set of risks in the second half despite strong semiconductor exports, including a shift in monetary and financial policy, increased stock market volatility, delayed recovery in construction investment, jobless growth, and a delayed domestic demand recovery, according to a new analysis.
In a report titled "Domestic Risks Requiring Management During a Transitional Economic Period," released Wednesday, the Hyundai Research Institute said, "The domestic economy in the second half faces a growing possibility of exposure to various risks, including a shift in monetary and financial policy, and must sustain growth momentum through appropriate responses."
The report said growth could slow if monetary policy shifts to tightening due to a prolonged "three highs." While a tightening shift in monetary policy is expected to contribute to stabilizing the exchange rate and prices, the report cautioned that it could lead to slower growth through a delayed recovery in domestic demand and warrants attention.
The institute also cited the construction slump as a major risk factor. "As recently as last year, construction investment was expected to recover this year after five consecutive years of negative growth, but major institutions have recently sharply lowered their forecasts," the report said. "There are concerns that the recovery could be further constrained by high prices, a high exchange rate, and high interest rates going forward."
The low employment impact of semiconductor-driven growth was also flagged as a problem. As of 2023, the employment inducement coefficient for IT manufacturing stood at 3.6, below that of services (10), construction (9.2), and manufactured goods (5.1). The institute projected that even if the real gross domestic product (GDP) growth rate rebounds this year, the rate of increase in the number of employed people could be similar to or slightly lower than last year.
The structure in which strong exports fail to translate sufficiently into a domestic demand recovery is another burden. "If export dependence on semiconductors and weak domestic demand persist, an external shock such as the end of the semiconductor super cycle could expand into a combined slump in both external and domestic demand," the report said.
Leverage investment that increased during the KOSPI's sharp rise was presented as a variable that could amplify financial market volatility. The institute recommended controlling the pace of base rate hikes, strengthening employment safety nets, re-examining the real estate project financing (PF) market, activating financial market stress tests, and expanding policy support for domestic demand-oriented companies.
