[Young journalist Jion Choi] Bank of Korea’s president Shin Hyunsong’s speaking that people need to pay attention to the price fluctuation of the semiconductor than the stock price of the semiconductor industries such as Samsung Electronics or SK Hynix in the situation where the ‘semiconductor power’ is leading Korea’s economy, is getting spotlighted. It is an analysis that the riffle effect of domestic demand may change depending on how high the semiconductor price is and how long it maintains its price. 

On July 16th, after the Bank of Korea announced that it would raise the base interest rate by 0.25% point, governor Shin Hyunsong said that, in establishing monetary policy, they are paying much more attention to the semiconductor price itself than the stock prices of companies. It means the semiconductor price is the key variable that determines Korea’s terms of trade. An increase in semiconductor prices leads to higher profits and expanded orders for Samsung Electronics and SK Hynix, which in turn supports the domestic economy through wage increase and other income growth. Since major semiconductor contracts are present through business-to-business (B2B) transactions, the prices do not appear in the spot market, but are mostly made under long-term contracts, making them difficult to identify. Nevertheless, they are regarded as one of the most important factors for predicting the future of Korea’s economy.

Due to the impact of rising semiconductor prices, Korea’s real gross domestic income (GDI) growth rate recorded exceptional 13.2% in the first quarter of the year. During the same period, the gross domestic product(GDP) growth rate was 3.8%. The gap between the two growth rates (9.4 % points) marked the largest difference since related statistics began to be collected in 1960.

The report pointed out that the biggest reason behind the sharp rise in GDI was the improvement driven by rising export prices.  Looking at the periods of economic improvement in 2009, 2015~2016, and 2020, the major factors were falling international oil prices and lower import prices caused by the global financial crisis, the pandemic (the state when the infectious disease become widespread wordwide across politics, economy, and society), and the U.S. shale boom. Recently, however, even amid soaring international oil prices due to the war between the United States and Iran, rising semiconductor prices have been leading the improvement in the terms of trade.

According to an empirical analysis conducted by the Korea Bank, in the past when lower import prices led the improvement in the terms of trade, households regarded it as a ‘temporary increase in income’, causing a weak effect on private consumption. As people did not expect their income to continue increasing, households placed more weight on saving than spending.

On the other hand, when higher export prices lead changes in the terms of trade, the spillover effect on income becomes much stronger through higher wages driven from expanded sales. As the belief that income will continue to increase grows, private consumption also recovers. In fact, due to the recent announcements of large-scale performance bonuses by semiconductor companies, the overall wage growth rate has become significantly higher than during previous periods of improvement in the terms of trade. During the period of rising import prices, companies also respond to expanding global demand by rapidly increasing production capacity, immediately leading expanded investment.

However, it also pointed out that behind the unprecedented semiconductor boom and the sharp rise in GDI lies the risk of increasing economic polarization. This is because such a trend may increase overall macroeconomic volatility and undermine the economy’s medium to long-term growth potential.

The growth of the semiconductor industry has caused the Information Technology (IT) manufacturing sector in Korea’s total manufacturing output to rise 51%, further intensifying the concentration of industrial production. Since the IT manufacturing industry has relatively low production and employment multiplier effects, and workers in related industries account for only 2.6% of total employment, the benefits of growth may become concentrated among employees of a small number of large corporations. A financial investment industry official explained, “If the effects of large performance bonuses and wage increases are limited to only a few major companies, it is difficult for the benefits to spread throughout the overall economy,” adding “Non-IT sectors may instead face sluggish business conditions and rising cost pressures.”

The concentration of growth itself in a specific industry may become a problem. In the case of semiconductors, the industry is highly affected by demand cycles, meaning that investment and tax revenues can fluctuate significantly depending on changes in demand.

Researcher from Bank of Korea stated, “As tax revenues become increasingly dependent on the semiconductor industry, fiscal capacity may fluctuate greatly depending on the semiconductor business cycle. After the surge in tax revenues generated during the IT boom of 2021~2022, they quickly turned into tax revenue shortfalls during the subsequent industry downturn,” adding “It is necessary to consider the risk that Korea’s high dependence on the IT industry could amplify volatility in the economy, public finances, and financial markets, and to draft medium and long-term policies accordingly.”

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