Construction slump forecast

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Construction slump forecast


Exports used to fuel the growth of the Korean economy, but not anymore. Construction investment is taking its place as the leading growth driver in the national economy.

Outbound shipments are lagging as neither major businesses nor domestic markets are sufficient enough to support the economy, thereby increasing the reliance on construction investment. However, forecasts are predicting a bad spell even for the construction industry starting next year.

Construction investment comprised 51.5 percent of the economic growth in the second quarter of this year, the highest since 1993, according to a report from the Korea Institute for Industrial Economics & Trade (KIET). This means that more than half of the GDP growth for the second quarter, 1.7 percentage points out of 3.3 percent, was led by building investments. In the last four quarters, construction investment has contributed 40.1 percent to export growth, equivalent to 1.2 percentage points out of the 3 percent GDP growth.

On the other hand, exports’ contribution to the economy’s growth is lessening over time. What used to be 0.8 percentage points during 2000 to 2014 dropped to minus 0.8 percentage points in the last four quarters.

“While the level of contribution made by export trading to the economic growth in the last four quarters has decreased by 1.6 percentage points compared to the average between 2000 and 2014, it has increased by 1 percentage point for construction investment. We can say that approximately 63 percent of exports’ slump was made up by construction investment,” said Kang Doo-yong, a senior researcher at KIET.

Leading the success of the construction investment are new homes, especially apartment buildings. Investment on housing has risen by an average of 21.9 percent in the last four quarters. Min Sung-hwan, a researcher at KIET, said that “the upturn in housing investment is due to the prolonged period of low interest rates added by deregulation on housing establishment policies. The increasing trend on household loans is also very relevant.” As exports slumped, construction investment prevented a sudden economic decline, Min said.

Kang, however, expressed concern that growth relies solely on construction. “Compared to other major developed countries, construction investment takes up a significantly bigger part of Korea’s GDP. Based on last year’s statistics, Korea’s birth rate was listed on the bottom of the 34-member nations of the Organization for Economic Cooperation and Development (OECD), and an overheated investment on building houses could lead to excessive supply,” Kang said. Also, as household loans have reached their highest since the last quarter of 2002, amounting to 1,257.3 trillion won by this year’s second quarter, the construction business could face serious turmoil.

In fact, analysts have warned that the construction business is headed for an economic slowdown. A report by Hyundai Research Institute released Sunday on the 2017 Korean economy predicted that next year’s construction investments will rise by 3.9 percent, half the predicted amount for 2016.

“Many factors will contribute to the decrease of the construction investment next year, such as oversupply in housing buildings and increase in household loans,” said Chung Min, a researcher at HRI. “In addition, with government spending on large-scale infrastructure projects, referred to as social overhead capital (SOC), hitting its lowest in nine years, construction investment even in the public sector is expected to shrink.”

An uneven growth structure that is too dependent on construction is bad for the Korean economy even in the long run, as it may hamper growth. Min signaled that the country faces a probable headwind because “our recent development structure that’s mainly focused on construction investment is similar to a debt-fuel growth in that it’s taking place alongside the rise of household loans.”

He warned: “We could be following the trails of 1990s Japan who failed to stimulate their economy through construction investment.”

Ju won, a senior researcher at HRI, emphasized the importance of “reviving households’ consumer sentiments to fortify the domestic market. Government should endeavor to strengthen existing companies’ competitiveness through various means, including deregulation on industrial investment, and develop new items to reinforce export trading.”

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