Bank of Korea: "If Semiconductor Export Volume Rises Over 20%, Growth Above 3% Possible"

May Economic Outlook Despite a Strong First Quarter, Second Quarter Growth Expected at 0.2% Semiconductor Performance Helps Buffer Middle East Shock Growth Could Fall to Low 1% Range If Negative Scenarios for Semiconductors and Middle East Overlap The Bank of Korea has projected that if this year's growth rate of semiconductor export volumes exceeds last year's level and expands to the mid-20% range, the annual economic growth rate could surpass 3%. On May 28, the Bank of Korea raised its forecast for South Korea's economic growth rate this year from the previous 2.0% to 2.6% in its "May Economic Outlook." This projection is based on the assumptions that military tensions in the Middle East will gradually ease, allowing the volume of traffic through the Strait of Hormuz to recover smoothly to around 60% by the fourth quarter of this year, and that the international oil price (Brent crude) will rise to an average of $103 per barrel in the second quarter before declining to around $95 in the second half. For semiconductors, it is assumed that the export volume growth rate will remain at a level similar to last year's 16% and will slow moderately to around 10% next year. Specifically, it is expected that the shock from the war in the Middle East will lower the growth rate by 0.4 percentage points, but the improvement in the semiconductor market and robust IT exports will raise it by 0.7 percentage points. The supplementary budget and booming stock market are also estimated to boost the growth rate by 0.2 percentage points and 0.1 percentage points, respectively. By quarter, the first quarter showed a surprising 1.7% growth compared to the previous quarter, and the second quarter is expected to grow 0.2% quarter-on-quarter. The Bank of Korea stated, "Despite the impact of the Middle East war and the base effect from the significant growth in the previous quarter, semiconductor exports are maintaining a solid trend," adding, "Government policies such as the supplementary budget and corporate responses are expected to buffer the shock from the Middle East." In the third quarter, growth is projected to slow to 0% due to production disruptions in some industries caused by a global energy supply-demand imbalance, but a recovery is expected to resume in the fourth quarter (0.4% projected) as the energy supply chain gradually normalizes. The growth rate forecast for next year has been raised from 1.8% to 2.1%. This reflects the expectation that as the Middle East situation stabilizes and oil prices gradually fall, improved income conditions driven by strong performances of IT companies will strengthen consumption momentum. However, the Bank of Korea noted that the uncertainty surrounding the forecast path is higher than ever. Accordingly, it presented both optimistic and pessimistic scenarios, divided by semiconductor market conditions and the Middle East conflict. First, if the semiconductor export volume growth rate expands into the mid-20% range this year and remains at a high level in the mid-10% range next year, South Korea's growth rate could be 0.5 percentage points higher than the base forecast. If both semiconductor demand and production capacity outperform expectations, the annual growth rate could rise to as high as 3.1%. Conversely, if some big tech companies slow the pace of their investments and demand for electronic devices such as PCs and smartphones also weakens, the annual growth rate could be dragged down by 0.3 percentage points. Regarding the Middle East situation, if tensions subside quickly and international oil prices stabilize rapidly, falling to an average of $80 in the second half, the annual growth rate could be raised by 0.1 percentage points. Conversely, if the volume of traffic remains at around 30-40% until the end of the year and international oil prices stay elevated above $100 even at year-end, this year's growth rate could be further reduced by 0.5 percentage points. The Bank of Korea stated, "If both the semiconductor market and the Middle East situation develop optimistically or pessimistically at the same time, the impact on our economy will exceed the arithmetic sum of each scenario," adding, "In particular, if negative scenarios overlap, negative feedback between the financial and real sectors may occur, causing a further slowdown in growth." Meanwhile, the forecast for this year's consumer price inflation rate has been raised from 2.2% to 2.7%. This is based on the assumption that not only will petroleum prices rise sharply, but the shock of high oil prices will also spread to non-petroleum items with a time lag. Core inflation is expected to rise by 2.4%, significantly exceeding the previous forecast of 2.1%, as the effects of high oil prices spread to industrial goods and personal services from the second half of the year. On a monthly basis, both consumer price inflation and core inflation are expected to reach their highest levels this year in August, as the base effect of the telecommunications fee discount comes into play.