BOK Says AI-Driven Terms-of-Trade Gains to Have Bigger Spillover to Domestic Demand

A Bank of Korea report said an economic upswing fueled by soaring semiconductor prices could give a substantial boost to domestic demand.

In a report released on July 19 titled "BOK Issue Note: Why This Improvement in the Terms of Trade Is Different: Spillover Effects of the Semiconductor Boom on the Real Economy," the central bank said the recent chip upcycle and the resulting sharp improvement in the terms of trade will be a key driver supporting growth in domestic demand.

South Korea's gross domestic product grew 3.8% in the first quarter from a year earlier as semiconductor prices surged. Gross domestic income rose 13.2%, far outpacing GDP growth. The 9.4 percentage-point gap between GDI and real GDP growth in the first quarter was the widest since records began in 1960.

The central bank said the recent improvement in domestic economic conditions tied to the semiconductor boom differs in quality from past cycles. In the past, lower import prices, including declines in global oil prices, drove improvements in the terms of trade. This time, higher export prices led the gains even as Middle East oil prices rose.

The terms of trade compare export prices with import prices and indicate how many imports a country can buy with one unit of exports. They improve when import prices fall or export prices rise, allowing South Korea to purchase more imports with its export earnings.

The Bank of Korea said the rise in semiconductor prices is set to persist for some time, extending the improvement in the terms of trade. In the report, it said the current expansion in the chip cycle stems not only from short-term supply and demand factors but also from a structural increase in demand linked to the spread of artificial intelligence. That means the magnitude and duration of the cycle could exceed past episodes. As a result, favorable terms-of-trade trends are projected to continue for an extended period, supporting solid growth in GDI.

The bank said the spillover to domestic demand will also differ from past periods because rising export prices, rather than falling oil prices, are driving the improvement in the terms of trade. It said that could underpin stronger consumption through wage increases. Wealth effects from rising stock prices may also contribute to stronger consumption.

Lee Jong-woong, a deputy director, said improved income conditions and the benefits for domestic demand through wage growth will begin to appear from next year. If wage gains spread beyond semiconductors to other industries, higher pay could translate into stronger consumption, he added.

The Bank of Korea said investment is also poised to expand rapidly on the back of sharp earnings improvement at semiconductor companies.

The central bank said, however, that the medium- to long-term growth path could vary depending on how the gains from the semiconductor boom are used, given that the benefits are concentrated in some industries and income groups. It added that authorities need to watch for the risk of widening financial imbalances if the gains from the chip upcycle flow into non-productive sectors such as real estate rather than productive investment.

Shim Seong-mi, Hankyung.com reporter smshim@hankyung.com