South Korea faces domestic demand slowdown despite export recovery, says KDI

South Korea is grappling with a mild deceleration in domestic demand, particularly in private consumption and investment, attributed to elevated interest rates.

Despite a noteworthy recovery in the semiconductor sector, South Korea is experiencing a slight slowdown in domestic demand, specifically in private consumption and investment, as indicated by the Korea Development Institute (KDI) in its monthly economic assessment report.

The report acknowledges that the economy has shown a “slight slowdown in domestic demand” but notes a gradual softening in the downturn, largely attributed to the resilience of the semiconductor industry. The semiconductor sector has played a pivotal role in stabilizing the economy, even as other segments experience deceleration.

Private consumption and investment are facing challenges influenced by persistently high-interest rates. The KDI emphasizes that this has led to a deceleration in both employment growth and inflation. However, the report highlights that exports are exhibiting a recovery, serving a crucial function in offsetting the economic slowdown.

For the first time in nine months, the KDI has pointed out weak domestic demand in its December report. Retail sales in November, a key indicator of private spending, inched down by 0.3 per cent year-on-year, improving from a 4.5 per cent fall the previous month. The institute notes that this improvement is primarily due to temporary factors, such as major discount events and a low-base effect.

Despite the overall recovery, the service sector’s output remains sluggish, with the accommodation and food service sector witnessing a 3.3 per cent decrease, and the wholesale and retail trade decreasing by 1.5 per cent.

Facility investment continues to be subdued, influenced by high semiconductor inventories and persistently high-interest rates. Inflation, reflecting weak domestic demand, moderated to 3.2 per cent year-on-year in December, down from 3.3 the previous month.

The KDI acknowledges the positive role of exports in the economic recovery, with solid sales in the semiconductor and automobile sectors driving a 5.1 per cent year-on-year growth in exports in December. While exports experienced a yearlong downtrend, they have shown on-year monthly gains since October of the previous year.

Despite the challenges, the government anticipates a robust rebound in exports, projecting an 8.5 per cent growth in 2024 to surpass US$700 billion, marking a record high.