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The Korea Development Institute raised its growth forecast for South Korea this year to 3.2% from 2.5%, a 0.7-percentage-point upgrade, citing a stronger-than-expected global semiconductor boom driven by AI investment that is pushing exports and facility investment sharply higher. The institute also lifted its growth outlook for next year to 2.2% from 1.7%, a 0.5-percentage-point increase.
KDI warned, however, that the chip-led expansion is not spreading broadly enough to employment and household incomes. The institute now expects the number of employed workers to grow by only 110,000 this year — 60,000 fewer than its previous forecast — even as it raised the overall growth projection. The revision signals that the gap between headline growth and what ordinary households actually feel may persist.
KDI laid out the projections Wednesday in its revised August 2026 economic outlook, forecasting that the South Korean economy will grow 3.2% this year on the back of the global semiconductor boom before expanding a further 2.2% next year. Both figures represent upward revisions from the institute's May forecast — by 0.7 and 0.5 percentage points, respectively.
Semiconductors are the central engine behind the upgraded growth forecast. KDI said the South Korean economy has been posting strong growth driven by the global chip boom tied to AI demand. GDP expanded 0.6 percent quarter-on-quarter and 3.7 percent year-on-year in the second quarter, with both exports and domestic demand contributing. Exports and facility investment continued to rise sharply on the strength of the semiconductor cycle, while construction investment remained sluggish.
The global memory chip market outlook has improved dramatically. The World Semiconductor Trade Statistics organization forecast that global memory chip sales will surge 302.0 percent this year and a further 36.0 percent next year. KDI used those projections as the basis for assuming that global semiconductor demand will come in above its earlier expectations.
Total exports are forecast to grow 8.7 percent this year as a result. Goods exports are expected to rise 8.6 percent, led by strong performance in information and communications technology products, particularly semiconductors. KDI raised its goods export growth forecast by 4.1 percentage points from its previous estimate. Total export growth next year is projected at 5.0 percent.
The facility investment outlook was revised up by an even wider margin. Buoyed by expanding global AI infrastructure spending, facility investment is forecast to grow 7.9 percent this year and 7.0 percent next year, with semiconductors at the center of the gains — both figures are 4.6 percentage points above the previous forecast. Construction investment, by contrast, is expected to grow just 0.1 percent this year, weighed down by a slump in regional real estate markets and rising construction costs. Next year, construction investment is projected to recover to 2.7 percent growth, supported in part by semiconductor factory scale-ups.
The semiconductor boom is also expected to push the current account surplus to a record level. KDI forecast a current account surplus of $359.7 billion this year and $356.2 billion next year — up $120.7 billion and $142.5 billion, respectively, from its previous projections. The institute attributed the improvement to a sharp rise in semiconductor prices driven by strong global AI investment demand, as well as a more limited increase in international oil prices than initially expected despite the ongoing Middle East war.
The concern is that the chip sector's outsize growth is not filtering through sufficiently to households and the labor market. KDI said that while real gross national income has surged, the income gains are concentrated in semiconductor-related sectors, leaving private consumption growth relatively modest. Real wage growth has also remained low, meaning the benefits of economic expansion are not spreading widely to the incomes of most households.
The forecast for private consumption growth this year was raised by only 0.1 percentage point to 2.3 percent. Next year, private consumption is expected to grow 2.0 percent as the effects of rising real gross national income gradually spread to households more broadly — a 0.5-percentage-point upgrade from the previous forecast.
The labor market is receiving even less of the growth dividend. KDI said that because economic expansion is concentrated in semiconductor-related sectors, which generate relatively few jobs, strong headline growth is not translating into a clear improvement in employment conditions. Weakness in construction and slow growth in non-semiconductor manufacturing have reduced hiring in those industries, while job creation in the services sector has also slowed. Employment conditions have deteriorated particularly among young workers, the institute said.
KDI accordingly cut its forecast for the increase in employed workers this year by 60,000 to 110,000 — a downgrade even as the overall growth projection was raised by 0.7 percentage points. Next year, the institute expects employment gains to widen to 200,000 as the domestic demand recovery feeds through to the labor market.
Inflation remains a concern. KDI forecast consumer prices will rise 2.7 percent this year, driven by higher international oil prices and improving economic conditions, before easing to 2.2 percent next year as oil prices stabilize. Both the current-year and next-year inflation forecasts were left unchanged from the previous outlook.
Semiconductors also represent the biggest risk to the outlook. KDI warned that as South Korea's economy has grown increasingly dependent on global semiconductor demand, any shift in the chip cycle could amplify volatility across the broader economy. If concerns about the return on AI investment cause global spending to contract, or if intensifying competition erodes the market share of domestic chipmakers, growth could slow sharply.
On the upside, KDI said actual growth could exceed its forecast if AI investment demand stays elevated and domestic chipmakers expand their supply capacity faster than expected. The institute also flagged uncertainty over US tariff policy, a potential re-escalation of Middle East geopolitical tensions, and the risk that stock market volatility could dampen consumer sentiment as key downside risks.
Moody's also sharply raised its growth forecast for South Korea this year, lifting its projection to 3.5 percent on Tuesday. The credit rating agency had forecast 1.8 percent growth in February, revised that up to 2.5 percent in May, and raised it by a further 1.0 percentage point three months later. Moody's put next year's growth at 2.7 percent.
Moody's, too, cited the semiconductor boom as the primary driver of its upgrade, and forecast that the global chip cycle will continue at least through the middle of next year. With KDI and Moody's both revising higher, major institutions are increasingly aligning around the view that the semiconductor boom justifies a substantially brighter outlook for the South Korean economy.
fact0514@heraldcorp.com
