🚨 Semiconductor Market Recovery and Domestic Demand Slump: Unbalanced Economic Growth
Today's Korean Economic News | 2025.05.01
📌 Despite Semiconductor Boom, Domestic Demand Remains Weak... Light and Shadow of March Industrial Activities
💬 In March, semiconductor production increased at the largest rate in 19 months, leading to a rise in overall industrial production for the second consecutive month. However, construction and service sector production decreased, while retail sales and equipment investment also fell, indicating continued weakness in domestic demand. The government emphasized factors for domestic demand recovery, such as reduced political uncertainty and supplementary budget planning, while also committing to risk management against external uncertainties and efforts to stimulate consumption.
1️⃣ Easy Understanding
Our economy is experiencing the double challenge of semiconductor industry recovery alongside domestic demand weakness. Let me explain this situation simply.
March industrial production statistics show the semiconductor industry has recovered significantly, boosting overall industrial production. Semiconductor production increased at its highest rate in 19 months, mainly due to growing global demand for AI and completed inventory adjustments.
However, the domestic economy continues to struggle. Construction and service sector production has decreased, while retail sales and business equipment investment have also declined. Household consumption has contracted due to high interest rates, inflation pressures, and real estate market stagnation.
In response, the government has prepared a supplementary budget of about 12 trillion won to stimulate the economy, but economic experts forecast this will only raise the economic growth rate by 0.1 percentage points. Some argue that "at least 20 trillion won in additional budget is needed."
Meanwhile, strengthened US protectionist policies and trade conflicts with China are also burdening our economy. The Trump administration's 25% high tariffs on Korean products are hurting key export industries such as automobiles, semiconductors, and steel.
Ultimately, our economy is growing with an imbalance between semiconductor-centered export recovery and domestic demand weakness, while the government seeks policies to stimulate domestic demand while balancing interest rates and fiscal policy.
2️⃣ Economic Terms
📕 Industrial Production Index
The industrial production index is an indicator showing overall domestic industrial production activities including mining, manufacturing, and utilities.
- It indexes production volume changes against a base year (currently 2020=100) and is an important indicator for judging economic trends.
- It is announced monthly and economic flow is identified by month-over-month or year-over-year growth rates.
📕 Domestic Demand
Domestic demand is a concept including all consumption and investment occurring within the country.
- It consists of household consumption expenditure, business equipment investment, and construction investment.
- It's an important indicator showing the fundamental strength of the domestic economy; stronger domestic demand creates an economic structure more resistant to external shocks.
📕 Protectionism
Protectionism is a policy that imposes tariffs or non-tariff barriers on imports to protect domestic industries.
- It appears in various forms such as tariff impositions, import quotas, and technical regulations.
- While it may protect domestic industries in the short term, it can cause reduced global trade and economic growth slowdown in the long term.
📕 Supplementary Budget
A supplementary budget is an additional budget prepared beyond the already established and confirmed budget.
- It is prepared during economic crises, natural disasters, or urgent fiscal needs, and is confirmed through National Assembly deliberation and resolution.
- During economic downturns, it serves as an expansionary fiscal policy tool to promote economic vitalization.
3️⃣ Principles and Economic Outlook
💡 Semiconductor Industry Recovery and Export Prospects
Let's look at the background of semiconductor industry recovery and future outlook.
First, the semiconductor industry is recovering due to increased AI demand and completed inventory adjustments. For the past two years, the semiconductor industry struggled with decreased demand and excess inventory after COVID-19. However, the market is rapidly recovering as high-performance semiconductor demand surges with AI technology advancement including ChatGPT. Particularly, demand for high-value-added memory semiconductors for data centers has increased significantly, improving performance of domestic companies like Samsung Electronics and SK Hynix. Additionally, new orders are increasing as inventory adjustments for traditional IT devices like PCs and smartphones have been completed. As a result, March semiconductor production increased by 47.5% year-over-year, and exports rose by 35.2%.
Second, the semiconductor industry recovery is providing great strength to our exports. Semiconductors are a key item accounting for about 20% of Korea's exports, and increased semiconductor exports are leading to overall export recovery. Total exports in March increased by 10.2% year-over-year, with semiconductors contributing 3.8 percentage points. Export amounts are increasing significantly as export unit prices of high-value-added AI semiconductors rise. This trend is expected to continue for the time being, with semiconductor industry boom likely to continue until the second half of 2025.
Third, semiconductor industry growth has positive effects on related industries. Increased semiconductor production leads to growth in related industries such as materials, components, and equipment. In March, imports of semiconductor manufacturing equipment and materials increased by 25.3% and 18.7%, respectively. Additionally, improved performance of semiconductor companies is expected to lead to expanded facility investment, having positive ripple effects on the domestic economy. Samsung Electronics and SK Hynix are planning investments of approximately 30 trillion won and 16 trillion won, respectively, this year.
While semiconductor industry recovery is a bright aspect of our economy, it also shows the vulnerability of an economic structure highly dependent on specific industries. Therefore, rather than being complacent with the semiconductor boom, efforts are needed to secure various future growth engines such as secondary batteries, biotechnology, and aerospace.
💡 Causes of Domestic Demand Weakness and Response Measures
Let's analyze the causes of domestic economic weakness and measures to overcome it.
First, the main causes of domestic demand weakness are high interest rates, inflation, and real estate market stagnation. With the base interest rate rising to 3.25% to respond to post-COVID-19 inflation, interest burdens on households and businesses have greatly increased. With household debt at about 104% of GDP, well above the OECD average, interest rate increases further limit consumption capacity. Additionally, household consumption sentiment is contracted due to high essential living costs such as food and housing. The reduced wealth effect from real estate market stagnation is also a cause of consumption weakness. Due to these factors, March retail sales decreased by 0.8% month-over-month, with particularly large decreases in durable goods (-2.4%) and semi-durable goods (-1.2%).
Second, the government's supplementary budget will contribute to domestic demand activation to some extent. The government's 12 trillion won supplementary budget will be used for supporting small business owners and vulnerable groups, export companies, and job creation. Of this, about 4 trillion won will be invested in direct domestic demand stimulation such as financing support for small business owners and energy vouchers for low-income groups. Additionally, 2 trillion won in consumption coupons and cashback programs will help activate consumption. However, critics note these policies might only have short-term effects, requiring more fundamental measures.
Third, comprehensive approaches are needed for sustained recovery of the domestic economy. First, interest rate reductions need to be considered to expand investment and consumption capacity of businesses and households. However, careful approaches are needed considering interest rate differences with the US. Additionally, fostering new industries and creating jobs through regulatory reform are important. Particularly, improving service sector productivity and securing new growth engines through digital transformation are necessary. In the long term, efforts to increase household income and improve distribution structure should be pursued in parallel. It's important to maintain a solid middle class—the foundation of domestic demand—through reasonable minimum wage policies, improved treatment of non-regular workers, and strengthened competitiveness of small and medium-sized enterprises.
Activating the domestic economy is essential for creating an economic structure resistant to external shocks. Domestic demand foundations should be strengthened through comprehensive approaches including short-term stimulus measures along with interest rate policies, regulatory reform, and income distribution improvements.
💡 External Risks and Korea's Economic Response Strategies
Let's explore response strategies for external risks such as US protectionism and US-China conflicts.
First, US protectionist policies pose a major challenge to Korean exports. The Trump administration's "America First" policy imposes 25% tariffs on Korean products. This is higher than levels imposed on Japan (24%) and the EU (20%). The automotive industry is particularly hard hit. The US is a key market accounting for about 30% of Korea's automobile exports, and 25% tariffs significantly weaken price competitiveness. Hyundai and Kia's US exports are expected to decrease by up to 300,000 vehicles due to tariffs. Major industries like semiconductors and steel are also affected, requiring comprehensive responses.
Second, reignited US-China trade conflicts are causing disruption to global supply chains. Global trade conditions have deteriorated as the Trump administration imposes 34% additional tariffs on Chinese products and China responds with retaliatory tariffs. This negatively impacts global economic growth and is an even greater burden on the Korean economy, which is highly dependent on both countries. Additionally, Korean companies face difficulties in strategic choices as the "decoupling" phenomenon accelerates, with global supply chains dividing into US-centered and China-centered networks.
Third, multifaceted strategies are needed to respond to these external risks. In the short term, efforts are needed to reduce tariff burdens or secure exceptions through trade negotiations with the US. Simultaneously, export market diversification should be strengthened by developing emerging markets such as India, ASEAN, and the Middle East. In the medium to long term, companies should enhance resilience to supply chain shocks through expanded local production, diversification of core component and raw material procurement sources, and strategic inventory maintenance. Particularly, flexible approaches are needed to consider Korea's strategic positioning in the US-China competition framework and maintain business in both markets simultaneously.
In a situation of increasing uncertainty in the external environment, it's important for the Korean economy to reduce dependence on specific markets or industries and diversify risks. Simultaneously, transition to a high-value-added industrial structure that competes on quality rather than price should be accelerated through strengthened technological competitiveness.
4️⃣ In Conclusion
The Korean economy shows an unbalanced growth pattern with semiconductor-centered export recovery alongside domestic demand weakness. While the semiconductor industry is rapidly recovering due to the AI boom and completed inventory adjustments, the domestic economy still lacks vitality with decreased construction and service sector production, and weak retail sales and equipment investment.
This unbalanced growth may help improve economic indicators in the short term but could weaken economic stability and resilience in the long term. Particularly, an economic structure with weak domestic foundations is inevitably vulnerable to shocks in situations of increased external environmental uncertainty.
The government is promoting domestic demand activation through a supplementary budget of about 12 trillion won, but this is likely to have only short-term effects. More fundamental domestic demand activation requires comprehensive approaches including interest rate policies, regulatory reform, and income distribution improvements.
Additionally, multifaceted strategies are required to respond to external risks such as US protectionism and US-China trade conflicts, including export market and item diversification, global supply chain restructuring, and expanded local production.
Ultimately, for sustainable growth of the Korean economy, efforts are needed to strengthen domestic foundations and diversify industrial structure rather than being complacent with the semiconductor industry boom. Particularly, a balanced economic structure should be built through securing future growth engines, strengthening service sector competitiveness, and activating ecosystems for small and medium-sized enterprises and startups.