Chip boom lifts Korea's income growth to 38-year high

South Korea’s economy extended its growth in the second quarter, weathering oil price volatility sparked by conflict in the Middle East, as robust chip exports fueled the expansion.

According to preliminary data released by the Bank of Korea on Thursday, the country’s real gross domestic product — a key gauge of economic growth — expanded 0.6 percent in the April-June period from the previous quarter, following a revised growth of 1.8 percent in the first months of this year.

“Although (gross domestic product) growth slowed from the previous quarter, growth typically declines sharply after an exceptionally strong quarter,” Lee Dong-won, director general of the BOK’s economic statistics department, told a press briefing.

“Maintaining 0.6 percent growth in the second quarter following the strong 1.8 percent expansion in the previous quarter indicates that the growth momentum has strengthened.”

The 0.6 percent quarter-on-quarter expansion was three times the Bank of Korea’s May forecast of 0.2 percent.

While domestic demand and net exports each accounted for half of the overall growth, contributing 0.3 percentage point apiece, the central bank attributed the upside surprise to stronger-than-expected semiconductor exports.

“Private consumption was largely in line with the forecast. The difference came from facility investment and exports, as the semiconductor sector performed better than expected, prompting stronger-than-anticipated capital spending,” Lee said.

Real gross domestic income, a measure of households’ actual purchasing power, far outpaced economic growth.

Real GDI rose 3.6 percent in the second quarter from the previous quarter and jumped 15.6 percent from a year earlier, marking the highest on-year growth in 38 years since the first quarter of 1988.

The stronger increase in Real GDI than in GDP indicates that the real income of domestic economic agents grew faster than output, supported by higher semiconductor export prices.

With the country posting a stronger-than-expected second-quarter performance, expectations are growing that the Bank of Korea will raise its full-year growth forecast above 3 percent in its updated economic outlook due Aug. 27.

If realized, it would mark the first time annual growth has exceeded 3 percent since the economy expanded 4.7 percent in 2021.

“Based on growth in the first half, annual growth could reach 3 percent as long as the economy contracts by no more than an average of 0.1 percent quarter on quarter in the second half,” Lee said, further adding that even if conflict in the Middle East escalates, the economy is unlikely to slip into negative growth in the second half.

The stronger-than-expected GDI reading for the second quarter is also likely to reinforce expectations that the BOK will raise its base interest rate again.

Following the first rate hike in over three years on July 16, BOK Gov. Shin Hyun-song identified second-quarter GDP and GDI as key indicators for determining the direction of future monetary policy at a post-meeting press conference.

At the event, Shin stressed that GDI can serve as a key measure of the economy as GDP alone does not fully reflect income gains resulting from higher prices.

“GDI is growing much more strongly than GDP. If such robust income growth continues, we need to pay close attention to demand-side inflationary pressures,” Shin said.