South Korea escaped the "$30,000 trap" in per capita gross national income for the first time in 12 years, a shift attributed to surging export prices driven by the semiconductor super cycle combined with a stronger won. Rising chip prices improved the country's terms of trade, allowing the same volume of exports to buy more imported goods, while the won's appreciation lifted national income measured in dollars. Some analysts caution, however, that because the income jump was driven largely by export prices, incomes could stagnate again unless the gains translate into a higher potential growth rate.
Real GNI, a measure of national purchasing power, rose 3.1% in the second quarter from the previous quarter, according to the Bank of Korea on the 9th. That is more than five times the 0.6% increase in real gross domestic product. On a year-on-year basis, real GNI rose 15.6%, the fastest pace since the fourth quarter of 1988, when it grew 15.7%.
GNI outpaced GDP largely because of improved terms of trade. Real purchasing power reflects not only income earned abroad but also the relative change between export and import prices. Semiconductor export prices climbed sharply as demand surged on the spread of artificial intelligence investment, pushing export price gains far above import price gains. The same volume of exports could buy more imported goods, lifting the country's overall real income.
The projection that per capita GNI will top $40,000 for the first time this year also reflects that income growth combined with the stronger won. The threshold, initially expected around 2028, now looks likely to be reached about two years early.
A reversal is also expected in international rankings. South Korea fell behind Japan in per capita GNI last year but could move ahead again this year as the won strengthens and income rises. Taiwan, however, is expected to be harder to catch. Its per capita GNI already passed $40,000 last year, and its real GDP is forecast to grow more than 10% this year.
The problem is that the income gain does not signal an improvement in the economy's underlying fundamentals. Nominal GDP jumped 26.4% in the second quarter from a year earlier, but the domestic demand deflator, which tracks price increases in the domestic economy, rose just 3.6%. That is one-sixteenth the increase in the export deflator. In other words, domestic prices did not rise broadly; export prices, led by semiconductors, drove up the nominal growth rate.
The gains from the export boom are also spreading to households slowly. Private consumption rose just 0.4% in the second quarter from the previous quarter, and government consumption edged up 0.1%. The gap between corporate and household income growth was stark.
Total operating surplus rose 18.5% in the second quarter from the previous quarter, the fastest pace since the statistic was first published in the second quarter of 2010. Compensation of employees, the main source of household income, rose only 1.9%. Improved earnings at exporters, including chipmakers, lifted corporate income quickly, but the gains have yet to spread sufficiently to wages and consumption.
With income not flowing directly into spending and investment, the gap between savings and investment widened. The gross savings rate reached 45.6% in the second quarter, up 3.9 percentage points from the previous quarter and the highest level since the data series began in the first quarter of 1970. The gross domestic investment rate fell to 24.2% from 25.3%, the lowest in 51 years, since the third quarter of 1975, when it stood at 22.0%.
The decline in the investment rate cannot be read solely as a collapse in investment itself. Income grew far faster than investment, lowering investment's relative share of total income. Still, concerns remain that unless rising corporate profits feed into domestic facility investment and productivity gains, the economy will have weaker support for growth once the chip boom ends.
The Bank of Korea and the Korea Development Institute differ subtly in their views on the outlook. The central bank points to corporate income growth spreading beyond semiconductors to other manufacturing sectors such as chemicals and shipbuilding, as well as to services. It sees a possibility that corporate profits will be transferred to household income through interim corporate tax payments, dividends and performance bonuses in the second half, supporting a consumption recovery.
KDI, by contrast, emphasizes that improvements in exports and corporate earnings have yet to spread sufficiently into broad-based household income growth. Exports and facility investment are rising quickly, led by semiconductors, but real wage growth was just 0.3% in the first half, leaving households with limited improvement in the income conditions they actually feel.
The difference is reflected in growth forecasts for this year. The Bank of Korea projects 3.3% growth, factoring in the possibility that corporate income gains will feed into consumption with a lag and strengthen the domestic demand recovery. KDI put its forecast at 3.2%, taking into account the chance that corporate-led growth will not spread sufficiently to households.
Ultimately, whether the $40,000 era proves sustainable depends on how much of the income gained from the chip boom is channeled into productive investment and higher household income, analysts said. If structural drags on growth such as low birth rates, population aging and weak productivity are not addressed, per capita income lifted by export prices and the exchange rate could stagnate again.
"The future of the Korean economy depends on how we convert the time bought by additional tax revenue from semiconductors into a higher potential growth rate," a senior official at an economic ministry said.
