Market Update: Economy contracts in Q4 as chips gains fail to outpace losses in construction, capital spending – Full Analysis

 
Korea’s economy contracted in last year’s fourth quarter as weakness in construction and corporate capital spending outweighed gains from chip exports, pushing growth well below the central bank’s forecast, preliminary data showed on Thursday.
 
The GDP fell 0.3 percent quarter on quarter in the October–December period, according to the Bank of Korea’s (BOK) preliminary estimate for the fourth quarter. The contraction came 0.5 percentage points below the central bank’s November forecast of 0.2 percent growth, raising questions among economists over the outlook.
 
For the full year, the economy expanded 1 percent, marking the weakest performance since the Covid-19 downturn in 2020 and the fifth-lowest growth rate since 1960. The unrounded figure stood at 0.97 percent.
 
Lee Dong-won, director general of the BOK’s Economic Statistics Department, said the slowdown partly reflected base effects following strong growth in the third quarter.
 
“Some deceleration in the fourth quarter was expected due to base effects after the relatively high 1.3 percent growth in the third quarter,” Lee said.
 

 
By expenditure, private consumption rose 0.3 percent and government spending increased 0.6 percent, but construction investment fell 3.9 percent and facility investment declined 1.8 percent. Both exports and imports contracted, falling 2.1 percent and 1.7 percent, respectively.
 
Output data showed broad-based weakness across key sectors. Manufacturing output dropped 1.5 percent, construction output slid 5 percent and electricity, gas and water supply fell 9.2 percent.
 
Construction investment emerged as the main drag on growth. The central bank estimated that annual growth would have reached 2.4 percent if construction investment had been neutral. In the fourth quarter alone, construction shaved 0.5 percentage points off growth, while public and private consumption contributed just 0.1 percentage point each.
 
Lee said the downturn reflected structural constraints rather than a lack of demand. “Orders related to reconstruction and urban development are accumulating, but high construction costs have weakened profitability and prevented projects from moving into the construction phase,” he said.
 

Construction work is underway at a semiconductor industrial complex in Yongin, Gyeonggi, on Jan. 20. [YONHAP]

 
Economists said the stimulus from consumption vouchers introduced by the Lee Jae Myung administration had been largely exhausted by the third quarter.
 
“Private consumption was relatively strong in the third quarter, but it declined noticeably in the fourth,” said Yang Jun-sok, an economics professor at the Catholic University of Korea. “Short-term measures such as consumer vouchers did not create a sustained trigger effect.”
 
Despite record chip exports for the year, overall exports contracted in the fourth quarter as rising prices failed to translate into sufficient shipment volumes. Even so, chips accounted for most of the economy’s growth momentum. The BOK said semiconductor exports contributed 0.9 percentage points to annual growth.
 
The figures highlight the limits of relying on a narrow set of export industries to drive broader expansion. With growth running below Korea’s potential rate of around 2 percent, some analysts said the economy may be entering a phase of structural low growth.
 
The government has set a 2 percent growth target for this year, while the central bank projects growth of around 1.8 percent. The BOK said achieving growth in the high-1 percent range would require quarterly expansion of about 0.4 to 0.5 percent.
 

A screen at a currency exchange in Myeongdong, central Seoul, shows exchange rates on Jan. 21. [NEWS1]

 
Concerns are growing that an economy driven by strong exports and buoyant asset markets but weak domestic demand could become increasingly unbalanced. If liquidity continues to flow into financial markets rather than the real economy, an improvement in headline growth may fail to translate into better conditions for households and businesses.
 
Some economists say expectations around AI have intensified this trend, with investment and capital concentrating in a narrow set of sectors such as chips and in equity markets, further accelerating the concentration of wealth.
 
“When only asset markets such as equities overheat, the gap with the real economy can grow even wider,” said Kang Byung-goo, an economics professor at Inha University. “Policies need to be designed so that the benefits of growth spread more evenly.”
 
Policy options remain limited. The BOK held its benchmark interest rate at 2.5 percent earlier this month, citing risks to the currency and inflation amid the weakness of the won.
 
Joo Won, head of research at Hyundai Research Institute, said monetary easing was no longer a viable tool.
 
“The window for cutting rates has effectively closed,” Joo said. “With fiscal stimulus also constrained, how quickly private investment in areas such as AI picks up will be the key factor for future growth.”

This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.
BY KIM WON [[email protected]]