How Korea's 'construction slump' could harm its economic growth
Published: 02 Feb. 2025, 07:00
-
- LEE JAE-LIM
- [email protected]
![The headquarters of Shindonga Construction in Yongsan District, central Seoul, on Jan. 7 [YONHAP]](https://koreajoongangdaily.joins.com/data/photo/2025/02/02/a3462b38-f096-4dc1-98f0-69425c3828ba.jpg)
The headquarters of Shindonga Construction in Yongsan District, central Seoul, on Jan. 7 [YONHAP]
The domestic construction industry has been facing a prolonged downturn for more than a year, with renewed fears of bankruptcy and closure following the recent collapse of major firm Shindonga Construction.
The construction firm, which ranks 58th in construction capability, applied for a debt restructuring program on Jan. 6. Daezer Construction, the second-largest construction firm in South Gyeongsang, entered court receivership.
The financial struggles of regional small and midsize firms have persisted for more than a year, in the aftermath of Taeyoung Engineering & Construction’s entering of a debt workout in January 2024.
The number of construction workers has dwindled by nearly 160,000, with prolonged slump in the sector negatively impacting the domestic economy.
The nationwide number of construction companies that closed down last year was 2,666, according to data from the Knowledge Information System of Construction Industry, a 13.6 percent surge compared to the year before.
Thirty construction firms filed for bankruptcy during the same period, the highest in five years since 2019’s 49. The ongoing slump was due to the surge in construction costs from high interest rates that kicked in late 2022 and rising raw material prices. In November 2024, the construction cost index reached 130.26, a 29 percent increase compared to November 2020.
Moreover, the ratio of nonperforming real estate financing loans rose from 5.2 percent in December 2022 to 11.3 percent in November 2023, according to the Financial Supervisory Service.
The credit crunch has influenced new projects. Since November 2024, construction output has been declining for seven consecutive months, the longest period of decline since statistics began in August 1997. The total construction orders nationwide, which stood at 230 trillion won ($159.7 billion) in 2022, fell to 170 trillion won last year. The number of unsold housing units, even after construction, reached 18,600.
Poor performance in the sector is dragging down the country’s economic growth, according to experts. Investment in the sector, which had shown signs of recovery in the fourth quarter of 2022 after years of sluggish performance, declined again the following year, according to a report from the Korea Institute for Industrial Economics & Trade (KIET).
The report noted that weak construction investment had affected the nation’s low average economic growth rate of 2.2 percent from 2017 to 2023.
The Bank of Korea forecast that construction investment will shrink by 1.3 percent this year, which could further weaken domestic demand and lower the overall economic growth rate to 1.9 percent. The Korea Development Institute similarly predicted that sector investment would decrease by 0.7 percent and that the economic growth rate would reach only 2 percent.
“The construction industry is highly sensitive to economic conditions, and the sector’s downturn reflects how poorly the domestic economy is doing,” said Prof. Kang Sung-jin of Korea University’s Department of Economics.
Weak investment equals a decline in new projects, which affects employment as well. The number of construction workers fell to 2,011,000 last month, a decline of 76,000 compared to the month before and a decrease of 157,000 compared to the year before, Statistics Korea data shows. It was the lowest figure in four years since the 1,979,000 recorded in February 2021, during the peak of the Covid-19 pandemic.
On average, the number of construction workers dropped by 49,000 per month in 2024. Average monthly employment across all industries surged by 159,000 workers, but the growth rate was halved compared to the 327,000 workers recorded in 2023.
Experts are calling for the expansion of investment to aid the nation’s economic recovery. The KIET report estimates that an injection of 5 trillion won could create 32,000 jobs in the construction industry, with an addition of 22,000 jobs in related industries, and overall boost related industry output by 5.1 trillion won.
“To stimulate investment, the swifter advancement of major projects, such as the development of the 'third new town' or the completion of the Seoul-Sejong expressway, is needed,” said KIET researcher Park Hoon.
BY KIM WON [[email protected]]
with the Korea JoongAng Daily
To write comments, please log in to one of the accounts.
Standards Board Policy (0/250자)