🚨 KDI Keeps Growth Rate at 0.8%
Today Korean Economic News for Beginners | 2025.08.13
0️⃣ Construction Decline Drags Down Growth Despite 30 Trillion Won Stimulus
📌 Large government spending fails to offset 14-month construction investment decline, showing structural growth constraints
💬 The Korea Development Institute (KDI) announced it would maintain Korea's economic growth forecast at 0.8% for this year. While the 30 trillion won second supplementary budget slightly boosted consumption and exports, construction investment decline had a -0.4 percentage point negative impact, canceling out the positive effects. Construction investment in the first half showed a 14th consecutive month of decline with double-digit drop rates compared to the previous year. KDI said, "Despite interest rate cuts and large government spending, structural constraints in the construction industry are limiting the economic stimulus effects," and predicted that "construction investment recovery will be delayed in the second half as well." Despite improved semiconductor exports and consumption, weak domestic investment is blocking growth rate improvements.
1️⃣ Easy Explanation
The government spent 30 trillion won to boost the economy, but the construction industry's problems were so severe that the overall economic growth rate stayed the same. This shows how much construction investment affects the economy.
First, let me explain what a supplementary budget is. A supplementary budget means the government changes its original spending plan to spend more money. This is usually done to help the economy when times are bad or when disasters happen. This time, they made a huge 30 trillion won supplementary budget, which is about 5% of Korea's annual national budget.
When the government spends this much money, consumption usually increases and companies invest more, making the economy grow. Indeed, this supplementary budget had some effect on consumption. People received government support and spent more money, and exports also recovered, mainly in semiconductors.
But the problem was the construction sector. Construction investment means money spent on building or fixing apartments, office buildings, factories, roads, and bridges. This construction investment has been decreasing for 14 months straight, creating a big burden on the entire economy.
Why is construction investment so weak? There are several reasons. First, high interest rates over the past few years made it difficult to get loans for construction projects. Second, problems in the real estate PF (project financing) market made it hard to get construction funding. Third, more safety accidents at construction sites led to many work stoppages.
The construction industry is connected to many other industries. Construction requires countless materials like steel, cement, glass, and electronics, and creates job opportunities for many people. So when construction is weak, other industries also suffer.
KDI analyzed that "construction investment not recovering despite interest rate cuts and large government spending is due to structural problems." This means it's not just about lack of money, but fundamental problems in the industry itself.
This case shows that no matter how much money the government puts in, if structural problems in certain sectors aren't solved, overall economic growth can be limited.
2️⃣ Economic Terms
📕 Supplementary Budget
A supplementary budget is a budget that revises and supplements the budget already approved by the National Assembly based on economic conditions or special circumstances.
- It's created for economic stimulus, disaster response, and solving urgent national issues.
- Usually increases spending compared to the original budget to create economic stimulus effects.
- The 2025 second supplementary budget is 30 trillion won, the largest ever.
📕 Construction Investment
Construction investment is spending on building or renovating housing, commercial buildings, factories, and infrastructure.
- It accounts for about 15-20% of GDP, making it an important economic sector.
- It's very sensitive to interest rates, real estate markets, and construction business conditions.
- It has large ripple effects with other industries, greatly affecting economic fluctuations.
📕 Project Financing (PF)
Project financing is a financial technique that raises funds using future profits from a specific project as collateral.
- It's widely used for real estate development projects.
- When market conditions worsen, project viability drops and loan recovery becomes difficult.
- Recent real estate market decline has increased PF defaults, worsening funding difficulties for the construction industry.
📕 Structural Constraints
Structural constraints mean fundamental problems built into an industry or economic system, not temporary economic fluctuations.
- These are problems that can't be solved just by providing funds or policy support.
- In construction, strengthened safety regulations, labor shortages, and changes in contract structures are structural constraint factors.
- These constraints need long-term and comprehensive solutions.
3️⃣ Principles and Economic Outlook
✅ Effects and Limits of Fiscal Policy
Let's analyze the economic effects of large-scale supplementary budgets and their limitations.
First, short-term effects of the supplementary budget clearly appeared but varied by sector. The 30 trillion won supplementary budget focused mainly on consumption support and small business financial support, showing some effect in consumption. Through support for small businesses, living expense support for vulnerable groups, and local gift certificates, private consumption increased 0.2% compared to the previous quarter. However, this was just a direct effect of government spending, not leading to voluntary increases in private consumption. Especially, durable goods consumption remained weak, raising questions about the sustainability of consumption recovery.
Second, construction investment weakness came from structural factors, not just lack of funds. According to KDI analysis, the construction investment decline (-0.4%p) was strong enough to offset the supplementary budget effect (+0.3%p). This suggests fundamental problems that can't be solved just by increasing fund supply. Real estate PF defaults, increased construction company bankruptcies, decreased contract volume, and strengthened safety regulations worked together to cause overall construction industry contraction. Especially, capital area regulations and lack of demand in rural areas occurred simultaneously, leaving construction companies with nowhere to go.
Third, fiscal multiplier effects fell significantly compared to the past. The fiscal multiplier means the added value created in the entire economy when the government spends 1 won. In the past it was 1.2-1.5, but this time it's estimated to be below 1.0. This shows that as economic structures become more complex and private sector investment willingness weakens, the ripple effects of government spending are being limited. Also, with global supply chain instability and increased import dependence, the portion of fiscal spending leaking overseas has increased.
This case confirmed that fiscal policy alone cannot overcome structural economic recession.
✅ Structural Factors in Construction Industry Decline
Let's examine the fundamental causes of prolonged construction investment decline.
First, structural problems in the real estate PF market are worsening construction funding difficulties. Real estate PF was a major funding source for the construction industry, but project viability greatly deteriorated due to falling real estate prices and low pre-sales rates. Financial institutions are reducing or completely stopping PF loans, and existing PF projects are increasingly being forcibly liquidated as extensions become difficult. According to the Financial Supervisory Service, potentially problematic PF projects in the first half of 2025 amount to 130 trillion won, 30% of total PF balance. This creates a vicious cycle that further intensifies the construction industry's funding crunch.
Second, strengthened construction safety regulations and labor shortages are working together. Implementation of the Serious Accidents Punishment Act and various safety regulation enhancements greatly increased construction site costs. Safety management costs now account for 5-10% of total construction costs, worsening profitability, and some companies are giving up contracts altogether. Additionally, aging of skilled construction workers and decreased inflow of young workers have created serious labor shortages. Construction industry employment decreased by 80,000 compared to last year, leading to overall industry production capacity decline.
Third, changes in contract structure and regional imbalances are accelerating industry reorganization. In the past, large apartment complexes and commercial facility development were the construction industry's main focus, but recently the proportion of small-scale projects like remodeling, reconstruction, and infrastructure maintenance has increased. Small and medium construction companies that couldn't adapt to these structural changes are going bankrupt or reducing operations. Also, while the capital area faces supply constraints due to regulations, rural areas face demand shortages, causing nationwide construction business decline. In rural areas, population decline and aging are structurally reducing new construction demand itself, making recovery even more difficult.
Construction industry decline reflects changes in the industry structure itself, not just temporary phenomena, requiring long-term perspective responses.
✅ Future Growth Path and Policy Tasks
Let's analyze policy directions and prospects for overcoming the current growth rate stagnation.
First, comprehensive approaches for construction industry normalization are needed. Beyond simple funding support, PF market restructuring, reasonable operation of safety regulations, and construction industry structural reform must be pursued simultaneously. The government is considering establishing special organizations for PF soft landing, boldly liquidating problematic projects while providing liquidity support for recoverable projects. Also, long-term plans to transform construction from traditional labor-intensive industry to high-tech industry incorporating digital technology and automation are needed. This could solve labor shortage problems and increase productivity.
Second, diverse policy combinations for domestic demand stimulation are required. In situations where construction investment is weak like now, activating other domestic demand sectors becomes more important. Continued income support policies for private consumption stimulation, expanded tax benefits for equipment investment promotion, and service industry competitiveness strengthening are needed. Especially, increasing investment in future growth engine industries like digital transformation, eco-friendly technology, and bio-health to create new growth engines that can offset construction industry decline is necessary. KDI predicted that "construction investment decline will gradually ease from next year," but this is premised on active policy responses.
Third, balanced growth should be pursued while appropriately managing export dependence. While strong semiconductor exports are partially preventing growth rate decline, exports alone cannot completely offset domestic demand recession. Moreover, with expanding global trade conflicts and strengthening protectionism, export environments are also becoming unstable. Therefore, a two-track strategy maintaining export competitiveness while strengthening domestic demand bases is needed. This requires parallel efforts to expand domestic consumption bases through income distribution improvement, social safety net strengthening, and balanced regional development.
Ultimately, creating a balanced economic structure not dependent on specific sectors is key for sustainable growth.
4️⃣ Conclusion
KDI's maintained growth forecast well shows the complex situation Korea's economy currently faces. Despite investing the largest-ever 30 trillion won supplementary budget, the growth rate staying in place means our economy has structural problems that can't be solved just by simple fund injection.
The most notable point is the ripple effect of construction investment decline on the entire economy. The construction industry is connected to various industries like steel, cement, and electronics, and is a core sector creating many jobs. This sector has been contracting for 14 consecutive months, offsetting growth effects from other sectors.
The causes of construction industry decline are also complex. Real estate PF defaults, strengthened safety regulations, labor shortages, and contract structure changes are working simultaneously to contract the entire industry. This reflects changes in the industry structure itself, not just temporary economic recession, making it difficult to solve with just short-term policy prescriptions.
Nevertheless, there are hopeful signals. Export recovery led by semiconductors continues, and private consumption is also improving, albeit gradually. The problem is these positive factors aren't strong enough to offset construction industry decline.
Future tasks are clear. Solving structural problems in construction while simultaneously developing other growth engines. This requires comprehensive pursuit of PF market normalization, construction industry restructuring, and new industry development.
Ultimately, this case teaches that economic policy effectiveness depends on sectoral balance. If structural problems in one sector aren't resolved, achievements in other sectors can be offset, showing the need for comprehensive and long-term approaches.
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