Nomura Projects 2.4% South Korea Economic Growth as Chip Boom Struggles to Bolster Domestic Demand; July Bank of Korea Rate Hike Expected Amid Won Pressure
Despite the robust artificial intelligence-driven semiconductor boom, its positive effects are not significantly spilling over into South Korea’s broader economy. Concurrently, increasing concerns over currency stability and overall financial health are making a Bank of Korea (BOK) interest rate hike in July increasingly probable, as highlighted by Nomura’s senior economist on Friday.
During Nomura’s Korea Equities & Economy Media Briefing in Seoul, Park Jeong-woo, the firm’s senior economist for South Korea and Taiwan, emphasized that the crucial question for the national economy isn’t merely the strength of the semiconductor and stock markets, but whether this strength is effectively translating into robust domestic demand.
“No one can deny the incredible momentum in semiconductors, and the stock market has clearly benefited from this,” Park stated. “However, the key challenge is ensuring this economic strength permeates the entire economy.”
Park noted a discernible shift in the central bank’s stance since May, with less emphasis now placed on a K-shaped recovery and greater focus on the anticipated trickle-down benefits from the ongoing semiconductor upcycle. Nevertheless, Nomura remains unconvinced that these positive effects have become widespread across the economy.
“Thus far, the evidence suggesting that this economic warmth is substantially spreading to boost domestic demand remains limited,” he observed.
The direct contribution of the chip sector to South Korea’s gross domestic product appears more constrained than headline export figures might imply, Park explained. Semiconductor exports have been heavily influenced by price increases, while growth in shipment volumes has not been exceptional compared to historical averages.
Business investment has received a boost from the capital expenditure cycle of major chipmakers and is expected to maintain its strength through the third quarter. However, this effect could wane afterward, while the construction sector continues to face challenges due to elevated building costs and higher interest rates.
Consumption patterns also present a mixed picture. Park reported a 17 percent surge in department store card spending, significantly outpacing the overall card spending growth of approximately 2.5 percent. Yet, this increase seems concentrated in luxury purchases. Meanwhile, domestic automobile sales saw an 8 percent decline in May, indicating limited signs of broad-based consumption growth.
“The evidence suggesting that the semiconductor and stock market rally is effectively translating into widespread consumer spending is still not particularly strong,” Park reiterated.
Nomura forecasts South Korea’s economy to expand by 2.4 percent this year. This projection is slightly below the Bank of Korea’s 2.6 percent forecast but still exceeds the country’s estimated potential growth rate of under 2 percent.
“A 2.4 percent growth rate is certainly not a weak figure,” Park commented. “But considering the high expectations and the limited pace at which this economic strength is diffusing into domestic demand, we believe it represents an appropriate growth rate for the current year.”
Regarding inflation, Park clarified that Nomura views the current price pressures primarily as a supply shock rather than demand-driven inflation. Employment and wage data do not yet indicate the broad inflationary pressures observed between 2021 and 2023, he added, suggesting that inflation could peak around August or September.
Despite this, Park indicated that the BOK is likely to raise its policy rate in July, with Nomura anticipating it to eventually reach 3.25 percent. He emphasized that this decision would be driven less by growth and inflation metrics alone, and more by critical financial stability concerns, including the strength of the won and the stability of the housing market.
Park also stated that the Korean won is unlikely to strengthen to the 1,400-per-dollar level in the near term. Nomura’s foreign exchange team projects the won-dollar rate to stand at 1,470 by year-end and 1,420 in 2027, with upward pressure expected to persist for the time being.
“A 25-basis-point interest rate hike would not fundamentally alter the direction of the exchange rate,” he concluded. While a significantly larger move would be necessary to have a decisive impact on the currency, such a scenario appears improbable given the considerable burden higher rates would impose on households and businesses.
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