Economy overdependent on construction
By Yoon Ja-young
Amid sluggish exports, the economy is increasingly depending on the construction sector for growth. Analysts show concern that the overdependence on construction will lead to an oversupply of homes in the country which is suffering a dropping birthrate and aging population.
According to Korea Institute for Industrial Economics and Trade, construction investment contributed to 51.5 percent of the country’s economic growth achieved in the second quarter. Among the 3.3 percent GDP growth, 1.7 percentage points were due to construction investments. This contrasts with the period between 2000 and 2014 when construction investments contributed to only 5.3 percent of economic growth.
Exports, once a sustaining pillar of the economy, meanwhile, are losing steam. Exports contributed to an average 0.83 percentage points of economic growth between 2000 and 2014, but pulled down the overall economic growth rate by 0.8 percentage points between the third quarter of 2015 and the second quarter this year. Exports dipped for 19 consecutive months until July, making a small rebound in August which experts estimate to be temporary.
The construction investments were mostly led by housing construction. Investments in housing have been marking double-digit growth during the past year.
The institute noted that the phenomenon is not desirable.
“The ratio of construction investment in GDP is notably high in Korea compared with other developed economies. It is not desirable at all to depend on the construction sector for growth,” said Kang Du-yong, a senior research fellow at the institute.
He warned that it may lead to overinvestment and oversupply as the country is seeing low growth and a low birthrate.
“Korea’s fertility rate stood at 1.24 last year, the lowest among 34 OECD member countries. The heated housing construction investments can lead to overinvestment and oversupply.”
While housing investment tends to be followed by economic recovery, he doubted whether it would be so in Korea as most of the other indexes seem bleak.
The researcher also raised concern that the surging housing investments are likely to be linked with a steep increase of household debt. The country’s total household debt stood at 1257.3 trillion won in the second quarter, marking the steepest increase since the fourth quarter of 2002. He said the recent economic growth led by construction seems to be “debt-fueled growth.”
Experts advise that the economy needs a shift in growth structure.
“While suppressing overheating of housing investments, the contribution of private consumption and the service industry should be raised in economic growth so that they can make up for the sluggish exports and manufacturing sector,” Kang said, stressing that current growth structure is unsustainable.
Experts point out that private consumption takes only 49.5 percent of GDP in Korea, which compares with the OECD average 55.1 percent.
“To boost consumption, social welfare for senior citizens and the economically vulnerable should be expanded along with efforts for job creation,” Kang said.