"Safety First and Longer Construction Periods, Employment at 8-Year Low"... Construction Becomes the Achilles' Heel of the Korean Economy

Although the Korea Development Institute (KDI) recently revised up its economic growth forecast on the back of strong semiconductor exports, there is little room for complacency. This is because construction, which has deteriorated into a "quagmire of domestic demand" that erodes overall growth, remains sluggish. With no clear rebound signal in sight, there are projections that construction could become a "trigger" that drags down this year's economic growth.

Kim Younghoon, Minister of Employment and Labor, visited a construction site in Cheongju, North Chungcheong Province, last January. Yonhap News.

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According to the Bank of Korea on the 15th, the decisive reason our economy grew only 1.0% last year, far below the estimated potential growth rate of 1.8%, was construction investment. The Bank of Korea's real gross domestic product (GDP) analysis shows that construction investment posted a shocking contraction of -9.9% year-on-year in 2025. The contribution of construction investment to GDP growth came to as low as -1.4 percentage points. This means that if construction investment had merely stayed flat (0%) instead of turning negative, our economy could have achieved 2.4% growth last year. Without the slump in construction, the economy, which could have already achieved a soft landing on the back of favorable semiconductor exports, barely managed to stay in the 1% growth range after hitting the reef of construction.

This "construction-driven cold wave" is still ongoing. In its recently released revised economic outlook, KDI raised its forecast for this year's economic growth rate from 1.8% to 1.9%, but at the same time sharply lowered its projection for construction investment growth from 2.2% to 0.5%. At the end of last year, institutions such as the Bank of Korea, the National Assembly Budget Office, the Hyundai Research Institute, and KDI had projected the construction investment growth rate for 2026 at between 2.2% and 3.8%. It was a forecast that construction investment, which had recorded negative growth for five consecutive years since 2021, would rebound by more than 2%. Among these institutions, KDI was the first to cut its forecast.

Prime Minister Kim Minseok handing out rice cakes to workers at a dawn labor market in October last year. Yonhap News.

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KDI pointed out that the construction slump stems from structural changes rather than a simple cyclical downturn. In the past, there was a clear pattern in which construction would begin after a certain time lag following contract awards, but recently this formula has broken down due to factors such as high interest rates and rising construction costs. KDI assessed that construction starts in the fourth quarter of last year were weaker than expected, and that even at present it has not observed signs suggesting a recovery. On top of this, as construction periods themselves have become significantly longer compared with the past, a low-efficiency structure is taking hold in which the volume of work underway at any given time is reduced. A KDI official explained, "Heightened awareness of industrial accidents under the current administration is also acting as one of the factors extending construction periods."

In particular, the slump in regional real estate markets is intertwining with the structural problem of population decline, further delaying the recovery of construction investment. As unsold units pile up in non-metropolitan areas and the start of construction is postponed, it has become difficult to expect the kind of flexible rebound seen in the past. On the ground, the chill is even harsher than the indicators suggest. People in the construction industry all say that "even taking base effects into account, the atmosphere at construction sites is still an ice age." Aside from a few large-scale complexes in the Seoul metropolitan area, there are countless sites where not even the first shovel has broken ground due to difficulties in securing construction financing and problems with profitability.

The labor market has also been hit directly. While the service sector is driving overall employment, employment in the construction industry continues to decline due to the economic downturn, choking off the capillaries of the working-class economy. According to the National Data Office's "Employment Trends for January 2026," the number of employed persons in the construction industry stood at 1,901,000, the lowest level in 8 years and 11 months since February 2017 (1,899,000). If the current trend continues, it is highly likely that the 1.9 million mark will be broken. The construction industry is broadly classified into general construction and specialized construction, and workers employed in construction are those engaged in installing, maintaining, and repairing facilities through building, civil engineering, and equipment works.

Lee Eunhyeong, senior research fellow at the Construction & Economy Research Institute of Korea, said, "Forecasts that construction investment will rebound this year are closer to rosy scenarios that are out of touch with the cold reality on construction sites and in the industry," adding, "Even if the indicators improve, there is a considerable time lag from contract awards to permitting, groundbreaking, and actual hiring, so it will be difficult for some time for this to translate directly into a meaningful recovery in employment."

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