Despite Semiconductor Slump Easing... KDI Says Both Consumption and Investment Slow Down

January KDI Economic Trends
High Interest Rates Impact Domestic Demand Slowdown

Although the economic downturn is easing centered on semiconductors, a national research institute has diagnosed that the domestic demand sector is slowing down. It is assessed that the domestic demand sector, including consumption and investment in the Korean economy, continues to slow due to the impact of high interest rates.

On this day, KDI summarized in the 'Economic Trends January Issue' that "our economy showed a somewhat slowing trend in domestic demand, but the economic downturn is gradually easing centered on semiconductors." Last month, KDI mentioned "domestic demand slowdown" for the first time in nine months since last March, and this month also stated that "domestic demand somewhat slowed due to the high interest rate stance." In the December Economic Trends, KDI said, "Our economy shows signs of the economic downturn gradually easing centered on exports despite the slowdown in domestic demand."

KDI viewed that domestic demand weakness continues due to a decrease in consumption. It analyzed that goods consumption continues to decline and service consumption remains at a low growth rate. The retail sales index in November was -0.3% compared to the same month last year, narrowing from -4.5% in October. However, KDI said, "This is a base effect due to consumption contraction caused by the Itaewon tragedy in 2022 and temporary effects from discount events such as Black Friday." Service industry production (1.9%) recorded a low growth rate mainly in accommodation and food services (-3.3%) and wholesale and retail trade (-1.5%).

[Image source=Yonhap News]

Investment is also generally sluggish. The facility investment index in November expanded from -9.9% in the previous month to -11.9%, continuing a sharp decline centered on semiconductor investment. KDI analyzed, "Although semiconductor production and shipments improved, semiconductor inventories remained at a high level, leading to an expanded decline in orders for special industrial machinery closely related to semiconductor investment."

The growth rate of construction investment is also slowing. Construction performance in November increased by only 1.4%, lower than 3.5% in the previous month, due to sluggish construction orders since 2023. Construction orders, a leading indicator forecasting the construction economy (a bilateral contract where the client requests construction work to be completed by the construction company), declined by -29.5% due to worsening business conditions, indicating a high possibility of a slowdown in future construction investment growth.

Due to the sluggish domestic demand, the inflation rate is showing a slowing trend. Consumer prices in December recorded a 3.2% increase, lower than 3.3% in the previous month, as price increases slowed across most items. KDI viewed that the high interest rate stance led to demand slowdown, reducing price increases in major sectors except agricultural products (15.7%). KDI stated, "Amid growing concerns about a global decline in crude oil demand, increased petroleum supply caused international oil prices to fall, exerting downward pressure on inflation."

However, as exports recover centered on semiconductors, the economic downturn appears to be easing. Although the service sector closely linked to domestic demand continued a low growth rate due to the impact of high interest rates, the demand for AI server semiconductors expanded, leading to a 21.3% rebound in semiconductor exports, indicating a recovery in exports. Total industrial production in November increased by 2.5%. The growth rate expanded as semiconductor production surged. Total industrial production in October had recorded -1.8%.

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