Korean economy enters expansion phase with little need for fiscal stimulu...

(Yonhap)

The state-run think tank Korea Development Institute (KDI) has raised its 2026 economic growth forecast sharply to 2.5 percent, upgrading its outlook from 1.9 percent, diagnosing the current state of the South Korean economy as an “expansion phase.”

In a report released on Wednesday, the KDI raised its growth forecast for this year to 2.5 percent, up 0.6 percentage point from the 1.9 percent projection in February.

“The positive spillover effects from semiconductor exports outweighed the negative impact caused by the Middle East conflict,” said Jung Kyu-chul, head of KDI’s Macroeconomic and Financial Policies Department. “Of the 0.6 percentage point upward revision, semiconductors accounted for more than half, or 0.3 percentage point.”

He assessed that high oil prices stemming from the Middle East war would lower Korea’s economic growth rate by 0.5 percentage point, but the government’s 26 trillion won ($17.46 billion) supplementary budget would boost it by 0.2 percentage point.

“As the economy is currently in an expansionary phase, there is little need for fiscal policy aimed at economic stimulus,” Jung said.

In detail, Korea’s current account surplus this year is projected to reach $239 billion, surpassing $200 billion for the first time ever, driven by the semiconductor boom.

The current account surplus stood at $123.1 billion last year.

Facility investment is also forecast to increase 3.3 percent on year, while construction investment is expected to rebound to 0.1 percent this year from a decline of 9.8 percent last year.

Private consumption is projected to rise to 2.2 percent this year from 1.3 percent last year, supported by government subsidies related to high oil prices and the strong performance of the main Kospi market.

The concern lies in employment trends.

KDI projected the number of employed persons to increase by 170,000 this year, unchanged from its February forecast.

According to employment data released by the Ministry of Data and Statistics on Wednesday, the increase in the number of employed persons in April stood at 74,000, the smallest rise in 16 months.

Due to high oil prices triggered by the Middle East conflict, the increase in employment in the transportation and warehousing sector fell from 75,000 in March to 18,000 in April, while employment in the wholesale and retail, lodging, and restaurant sectors declined by about 80,000.

In particular, the employment rate among young people aged 15 to 29 continued to decline for the 24th consecutive month.

Meanwhile, global financial services firm Morgan Stanley released a report on the Korean economy on Wednesday, mentioning the possibility of a second supplementary budget aimed at supporting vulnerable groups and small business owners.

According to Morgan Stanley, the country’s corporate tax revenue is projected to reach 111 trillion won this year, with total national tax revenue expected to amount to 430 trillion won.