Low Employment Despite Fastest Growth in 50 Years: Korean Economy Faces Imbalances and Volatility

The Korean economy is facing growing volatility and polarization even as gross domestic product has risen at the fastest pace in half a century.

Although the economy is in a high-growth phase, employment has remained weak. The stock market is booming, but price swings are widening, while the rise in the exchange rate and consumer prices is increasing the burden on vulnerable groups.

The government plans to concentrate its economic policy efforts in the second half of the year on maintaining growth momentum while reducing imbalances and asymmetries so that people’s livelihoods can stabilize.

Quarterly nominal growth reaches highest level in 50 years… Gross national income posts record increase

According to the Bank of Korea and the National Data Office on the 14th, nominal gross domestic product in the first quarter grew by 10.5 percent from the previous quarter, according to preliminary figures, achieving a double-digit growth rate for the first time since the first quarter of 1976, when it rose 13.0 percent.

Real growth in the first quarter was calculated at 1.8 percent, the highest level in five years and six months, or 22 quarters, since the 2.3 percent recorded in the third quarter of 2020.

As exports increased, led by the semiconductor industry, growth rates that had been limited last year to 1.1 percent in real terms and 4.4 percent in nominal terms are expected to rise sharply this year. The Bank of Korea had earlier projected this year’s real growth rate at around 2.6 percent, but because the first-quarter preliminary figure came in 0.1 percentage point higher than the advance estimate, the annual forecast to be released in August is expected to be at least 2.7 percent or higher. Some foreign investment banks are already forecasting growth of over 3 percent.

Nominal gross national income in the first quarter rose 11.0 percent from the previous quarter. Like GDP, this was the largest increase in 50 years. The real GNI growth rate of 9.2 percent was at a record high.

Looking at the economy as a whole, the major indicators appear to be improving overall, with the recovery trend continuing and income rising despite external uncertainty caused by the war in the Middle East.

Employment declines, younger generation struggles… deficit of bottom 10 percent households reaches highest level since data began

Although the economic situation is improving, imbalances and weaknesses are being revealed across different sectors.

A representative area is employment. In May, the number of employed people fell by 40,000, or 0.1 percent, from a year earlier, marking the first negative figure in 17 months since December 2024, when the economy had contracted due to emergency martial law and employment fell by 52,000. The increase in employment had stayed in the 200,000 range for two consecutive months through March, but shrank to 74,000 in April and turned negative last month.

From January to May, the number of employed people increased by only about 116,000 per month on average. Compared with an average monthly increase of around 181,000 during the same period last year, this suggests that the vitality of the labor market has weakened.

The unemployment rate in May rose by 0.1 percentage point from a year earlier. The employment rate fell by 0.2 percentage point in April and by 0.5 percentage point in May. Last month’s decline was the largest in five years and three months since February 2021, when the pandemic pushed the rate down by 1.4 percentage points.

The loss of 140,000 manufacturing jobs dealt a blow to the labor market. Although semiconductors are driving growth, workers in that sector account for only about 4 percent of all manufacturing workers, making it difficult to expect a large job-creation effect.

Young people in particular appear to be struggling in the job market.

Amid a growing preference for experienced workers and the expansion of rolling recruitment, employment among people in their 20s has declined for 43 consecutive months, while unemployment among those aged 30 to 34, the core age group for early-career workers, has increased for 10 consecutive months.

Although overall national income has increased, the living conditions of the lowest-income group appear to have become more difficult.

According to the first-quarter household income and expenditure survey, monthly income for all households rose 2.4 percent from a year earlier to around 5.48 million won. However, for the first income decile, the bottom 10 percent, income fell by 0.9 percent to just over 730,000 won. Income for the first decile had increased in the second, third, and fourth quarters of last year, but turned downward for the first time in four quarters.

For the first decile, disposable income, calculated by subtracting non-consumption expenditures from income, also fell by 33,730 won, or 6.0 percent.

Among all income groups, only the first decile and the eighth decile, where disposable income fell by 0.4 percent, saw disposable income decline. But the decline rate and the size of the decline were larger for the first decile. This stood in contrast to the 2.7 percent increase in disposable income for all households.

For all households on average, the surplus amount, meaning disposable income minus consumption expenditure, was about 1.24 million won. But for the first decile, the figure was about minus 820,000 won, meaning they were in deficit.

The monthly deficit of the first decile increased by about 120,000 won, or 17.2 percent, over the past year. Since data began being compiled under the current standards in the first quarter of 2019, this was the largest deficit recorded. By contrast, for the tenth decile, the top 10 percent of income earners, the monthly surplus increased by about 430,000 won, or 8.1 percent, from a year earlier, reaching nearly 5.74 million won.

As employees in industries benefiting from the semiconductor boom, such as SK Hynix and Samsung Electronics, are expected to receive large performance bonuses this year, the gap between the first and tenth deciles could widen further.

The stock market is enjoying an unprecedented boom. On the 12th, the KOSPI closed at 8,123.62, up 359.67 points, or 4.63 percent, from the previous day, returning above 8,000 after three days. It first reached the so-called “8,000 KOSPI” level on a closing-price basis on the 26th of last month, and since then it has maintained the 8,000 level on 10 of 13 trading days.

But concentration and volatility are severe.

Calculations based on data from the KRX Data Marketplace show that, as of the closing price on the 12th, Samsung Electronics and SK Hynix accounted for about 51.4 percent of the total market capitalization of the KOSPI. One year earlier, the combined market capitalization of the two companies had been about 21.9 percent of the KOSPI total, showing a very clear concentration in a small number of stocks.

The KOSPI 200 Volatility Index, or VKOSPI, surged intraday to 80.85 on March 4 this year, surpassing the previous intraday record of 71.75 set on March 19, 2020, during the early spread of COVID-19. It went on to set new records three more times. On the most recent trading day, the 12th of this month, it climbed as high as 91.94 during the session.

VKOSPI is an index that uses KOSPI 200 option prices to measure the volatility investors expect over the next 30 days. It is also known as the “Korean fear index.”

Its closing value on the 12th was 89.91, higher than the previous peak of 89.30 recorded on October 29, 2008, during the global financial crisis, based on VKOSPI data collected from before the index was officially published.

As the stock market heats up, more people are borrowing money to invest.

According to the Bank of Korea, the outstanding balance of household loans from deposit-taking banks, including policy mortgage loans, stood at 1,181.8 trillion won at the end of last month, up 6.9 trillion won from a month earlier. The monthly increase was the largest in 21 months since August 2024, when it rose by 9.2 trillion won.

Of last month’s increase in loans, more than half, or 3.7 trillion won, came from other loans, which include overdraft accounts and general credit loans. This is believed to be the result of an increase in leveraged stock investment.

Cases of investors losing heavily after borrowing money to invest are also continuing.

Forced selling has recently surged, in which individual investors who borrowed money from securities firms to buy stocks fail to repay the funds within two trading days, leading their holdings to be forcibly sold.

An analysis of data from the Korea Financial Investment Association shows that from the 12th of last month to the 11th of this month, stocks worth about 1.1986 trillion won were liquidated through forced selling. This was 912.7 billion won, or 319.2 percent, more than the 285.9 billion won recorded in the previous one-month period.

Exchange rate soars despite record current account surplus… Prices are rising too

Although the cumulative current account surplus from January to April this year reached about 102.67 billion dollars, the largest since statistics began, the won-dollar exchange rate remains elevated. A seemingly contradictory situation is unfolding in which the exchange rate is rising despite sound foreign-currency liquidity.

In the Seoul foreign exchange market, the won-dollar exchange rate at the weekly trading close, based on the 3:30 p.m. closing price, has remained above 1,500 won for almost a month since the 15th of last month.

On the 5th of this month, during overnight trading, it exceeded 1,560 won, reaching the highest level in 17 years and three months since March 6, 2009, during the global financial crisis, when the intraday high was 1,597.0 won.

Alongside uncertainty over the Middle East situation, continued selling of Korean stocks by foreign investors has increased downward pressure on the won. From last month through the 12th of this month, foreign investors net sold more than 63 trillion won worth of domestic stocks. Foreign exchange authorities suspect that, in addition to supply-and-demand factors caused by foreign investors adjusting their domestic stock holdings and taking profits, there may also have been speculative trading or market-disrupting activity riding on the won’s weakening trend. On the 10th, the Bank of Korea and the Financial Supervisory Service launched a joint foreign exchange inspection targeting foreign banks and others.

As international oil prices rise due to the Middle East war, inflation is also climbing sharply.

Last month, the consumer price index rose by 3.1 percent, exceeding 3 percent for the first time in 26 months. Although the government’s implementation of a maximum petroleum price system significantly restrained the scale of the increase, petroleum product prices rose by 24.2 percent, pushing overall inflation up by 0.92 percentage point.

The exchange rate is also cited as a factor pushing prices higher. In April, import prices rose 16.8 percent in dollar terms. With the value of the won falling, the increase was even higher in won terms, at 20.2 percent.

Second-half economic policy to focus on stabilizing livelihoods and easing volatility… “Heightened vigilance on prices and employment”

Stabilizing people’s livelihoods, especially for vulnerable groups, and reducing shocks caused by volatility in major areas are emerging as key tasks for economic authorities in the second half of the year.

In the “Second-Half 2026 Economic Growth Strategy,” expected to be announced late this month or early next month, the government plans to maintain growth momentum while focusing on minimizing the impact of macroeconomic variables such as prices, interest rates, and exchange rates.

In particular, the government plans to actively support small and medium-sized enterprises, the self-employed, and vulnerable groups in order to overcome the harmful effects of polarization.

At an emergency economic headquarters meeting and economic ministers’ meeting held on the 12th, Deputy Prime Minister and Minister of Finance and Economy Koo Yun-cheol said, “We will maintain particular vigilance regarding prices, employment, and other issues, while doing everything possible to minimize the impact of the Middle East war and stabilize people’s livelihoods.”