[BOK Focus] 'The Returned Breadwinner' Despite Semiconductor Recovery... Ongoing Growth Concerns at the Bank of Korea

Lee Chang-yong Governor Emphasizes "Growth Rate in 1% Range Excluding IT Manufacturing"
Semiconductor Alone Rebounds... Overall Export Companies' Economic Sentiment Declines
Higher Possibility of Entering Interest Rate Cut Cycle in Second Half

"Excluding the IT manufacturing sector, the growth rate this year is expected to be around 1.7%, making it difficult for the public to fully feel the warmth of economic recovery." (January 1, New Year's Address by Lee Chang-yong, Governor of the Bank of Korea)

Despite the recovery trend in semiconductors, Korea's economy seems unlikely to easily smile this year. In his New Year's address, Lee Chang-yong, Governor of the Bank of Korea, said, "It is certainly welcome news that the semiconductor industry, which has faced difficulties, is gradually reviving," but he also hinted that the economy excluding semiconductors would not be easy.

The figure of '1.7% growth excluding IT,' which is below the potential growth rate, was also directly mentioned by Governor Lee at the year-end briefing on inflation target management. He said, "When the growth rate for next year is said to be 2.1%, it is because IT exports have largely recovered," adding, "Within the Bank of Korea, excluding IT, domestic demand-based growth is seen at 1.7%."

Lee Chang-yong, Governor of the Bank of Korea, is speaking at the "2023 Second Half Price Stability Target Operation Status Review Briefing" held at the Bank of Korea in Jung-gu, Seoul, on the 20th of last month. Photo by Joint Press Corps

According to the Ministry of Trade, Industry and Energy's 'Export-Import Trends,' exports in December last year increased by 5.1% year-on-year to $57.66 billion, marking the third consecutive month of growth. Semiconductors, which account for about one-fifth of Korea's total exports, are the main factor. The increase in demand for IT server semiconductors and the production cuts by semiconductor companies led to both price increases and volume growth. Semiconductor export value, which rose 12.9% in November last year, increased further by 21.8% last month. The semiconductor price index announced by the Bank of Korea for November also turned positive for the first time in 16 months.

However, as Governor Lee mentioned, despite the recent favorable trend centered on the 'hero product' semiconductors, the warmth of economic recovery is not spreading easily, which is also reflected in actual indicators. The business sentiment of export companies has rather declined recently. According to the Business Survey Index (BSI) for last month, released by the Bank of Korea near the end of the year, the BSI for export companies in manufacturing dropped by 5 points compared to the previous month. Export companies refer to those with export ratios of 50% or more in their sales.

Hwang Hee-jin, head of the Bank of Korea's Statistics and Survey Team, explained the decline in export companies' business sentiment by saying, "Although there was a recovery trend centered on semiconductors, the display sector was not doing well, and in key industries such as metals and chemicals, there was a loss in price competitiveness against Chinese products." This indicates that the degree of perceived economic recovery varies significantly by sector.

A Bank of Korea official added, "There was internal attention to the discrepancy between the general perception that exports are recovering and the business sentiment of companies," and explained, "Although the overall export volume may have increased, the situation varies by industry when excluding IT." This means that while the recovery in IT such as semiconductors is driving the economy, it is not a universal solution.

Governor Lee also emphasized, "Looking at the overall economic growth rate, it is close to the potential growth rate and may not require stimulus, but since many sectors are suffering and there are vulnerable groups, targeted stimulus policies may be necessary."

Professor Seok Byung-hoon of Ewha Womans University’s Department of Economics said, "According to economic forecasts from various international organizations and investment banks, while other major countries are expected to have lower economic growth rates this year compared to last year, only Korea and Taiwan are expected to have higher growth rates because their main export products, semiconductors, are leading the way," adding, "It seems the Bank of Korea Governor was pointing out that only semiconductors are recovering."

Such conditions are analyzed to potentially influence the timing of the Bank of Korea's interest rate cuts. As the major countries’ rate hike cycles come to an end, there is more room to focus on domestic conditions when deciding monetary policy. Professor Seok said, "Since evidence of price stabilization is expected to begin appearing in earnest after the first half of the year, it is highly likely that interest rate cuts will be actively implemented from the second half," adding, "The emphasis on the negative outlook for the economy excluding IT supports this prediction."

This content was produced with the assistance of AI translation services.