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The Real Economy’s Reliance on Investment in Construction ? Issues and Policy Implications

Author Kang, Duyong; Min, Sunghwan; Date 2016.09.19 Issue No 633

The Korean economy is seeing increases in both investment in construction and construction sector output as shares of GDP growth.   
● Investment in construction contributed more than 50% to Korea’s annual GDP growth in the second quarter of 2016.
● Investment in construction as a share of Korea’s GDP growth reached the highest level since the second quarter of 1991, based on the average of the past four quarters, from the third quarter of 2015 to the second quarter of 2016 (excluding quarters which recorded annual GDP growth of less than 2%).

● The construction sector recorded an annual growth of 12.4% in the second quarter of 2016, the highest level since the fourth quarter of 1993.

Korea’s recent economic growth is driven by the construction sector, which has compensated for lackluster exports and a resulting decline in the external sector as a share of GDP growth.
● Compared with the period between 2000 and 2014, net exports as a share of Korea’s GDP growth decreased by a quarterly average of 1.6%p over the past four quarters, and investment in construction as a share of Korea’s GDP growth increased by an average 1%p during the same period.

The sharp increase in investment in construction has been driven by housing investment, which is accompanied by the rapid increase in household debt. 
● Housing investment recorded an average growth rate of 21.9% year-on-year over the past four quarters, two times higher than that of total investment in construction. 
● The rapid increase in housing investment coincides with a sharp rise in household debt, especially mortgage loans, which suggests the possibility of debt-fueled growth.

Should Korea’s exports remain weak, it will be necessary to shift the economic structure by stimulating private spending and service industries to compensate for the shrinking economic contribution by the export and manufacturing sectors.