The semiconductor-led momentum of South Korea's economic growth, concerns over sluggish domestic demand and industry polarization

In the first quarter of this year, South Korea’s economy appeared to show a clear growth trend on the surface, but a closer look at the actual content reveals that the achievements are concentrated in the semiconductor and financial sectors, with a more pronounced disparity between manufacturing and service industries.

According to data from the national data portal and industry activity trends on the 3rd, manufacturing production, seasonally adjusted, grew by 3.0% quarter-on-quarter in the first quarter. This is the largest increase since the fourth quarter of 2020. However, this figure was almost entirely driven by semiconductors. During the same period, semiconductor production increased by 14.1%, reaching the highest growth rate since the second quarter of 2023, but the growth rate of manufacturing outside semiconductors was only 0.2%. This means that not all manufacturing sectors experienced balanced recovery; rather, the prosperity of specific industries supported the overall indicators. In fact, excluding semiconductors, manufacturing shifted from a 1.1% growth in the fourth quarter of 2024 to a -0.1% in the first quarter of 2025, with fluctuations in subsequent quarters, showing no clear recovery trend.

The government’s announced economic indicators for the first quarter appear quite strong on the surface. Six major indicators—total industry, mining and manufacturing, services, retail sales, equipment investment, and construction volume—all showed growth, and real GDP increased by 1.7%. This is the first such increase since the second quarter of 2023. However, the manufacturing diffusion index, which measures the breadth of actual production expansion, shows a different picture. An index below 50 indicates that more industries are experiencing declines than increases; in January, it was 52.8, dropping to 47.9 in February, and only staying at 49.3 in March. Based on March, 34 industries experienced growth, while 35 industries declined. This means that although the overall average has improved, it is difficult to say that the economic activity on the ground has widely expanded.

The situation in the service sector is similar. Thanks to active financial markets, the financial and insurance industry grew by 4.7% quarter-on-quarter in the first quarter, marking the largest increase since the third quarter of 2022. This can be seen as driven by rising stock prices and expanded trading, which boosted demand for financial-related services. Conversely, industries closely related to daily consumption, such as accommodation and food services, declined by 1.3%, and arts, sports, and leisure services also fell by 3.2%. Accommodation and food services showed a continuous decline in February and March, with analysis indicating that the downturn in accommodation was more pronounced than in dining. While industries connected to asset markets like finance performed well, sectors relying on civilian consumption, tourism, and leisure struggled to gain momentum.

Experts believe that this growth structure provides limited support for employment and domestic demand recovery. Professor Yang Jun-sik from Katol University’s Department of Economics explained that the semiconductor industry, compared to traditional mainstay industries like automobiles, has a relatively small employment scale and a narrower scope of related industries. In other words, even if exports and corporate performance improve, this enthusiasm is limited in spreading to individual business owners or regional commercial districts. High value-added industries like finance and insurance are highly specialized with high entry barriers, while the accommodation and food service industries, although easier to enter, face fierce competition that can erode profitability. This background contributes to increased polarization. Kim Kwang-sik, head of the Economic Research Office at the Korea Institute for Industrial Economics and Trade, also pointed out that industry gaps are widening wage disparities among workers, which could ultimately lead to a structure where domestic demand is supported by a small high-income segment.

In summary, the current growth momentum, while strong in numbers, is still far from a stage where it can evenly enhance the overall industrial structure. During the sustained growth driven by the semiconductor and financial sectors, if the domestic demand industries remain sluggish for a long time, industry disparities could expand into income and asset gaps. The future trend depends on whether policies can simultaneously promote growth beyond semiconductors and restore the foundation of domestic demand. New markets such as defense industries, post-war reconstruction needs, and data center construction are mentioned as alternative options, precisely for this reason.