Transcription
The South Korean economy is having a wild time at the moment. GDP is booming. Two of its biggest companies, Samsung and SKH Highix, recently entered the $1 trillion club, and bumper profits mean that tens of thousands of Samsung and SKH Highix employees are due multi-million dollar bonuses this year.
However, peek under the proverbial bonnet and things quickly start to look a bit shaky. So, in this video, we're going to look at South Korea's economic boom and why it's both more imbalanced and arguably more bubbly than it first appears.
Anxieties about material self-sufficiency, a turn towards protectionism, great powers asserting their spheres of influence. This all looks suspiciously similar to the buildup to the First World War. In the latest issue of our magazine, we explore the remarkable parallels between now and then and ask whether we can avoid a third one. That's just one of 80 pages in the magazine because there's more in too long than you'd expect. Purchase your copy by clicking the link in the description.
So, at first glance, the South Korean economy looks like it's doing unequivocally great. Having grown by about 1% in 2025, the OECD expects South Korea's growth rate to nearly triple in 2026, forecasting GDP growth of 2.6%. This becomes even more impressive when you factor in the fact that thanks to its incredibly low birth rates, South Korea's population is already shrinking. This implies that on a per capita basis, South Korea's economy is expected to grow by nearer 3%. Which would be one of the highest rates in the OECD.
Furthermore, this could plausibly be an underestimate. In just the first quarter of this year, South Korea posted GDP growth of 1.7%. Which would translate to an annual growth rate of about 7%. This was largely driven by exports, which rose by 38% year-on-year, but these show no signs of slowing down. More recent data suggests that exports actually extended their momentum in April and May, suggesting we should expect some pretty impressive GDP numbers for the second quarter as well.
Anyway, as you might already know, much of this economic boom is being driven by AI. For context, South Korea dominates in the production of certain high-end memory chips. The AI boom has created massive demand for these chips, and this has given way to an export boom, which has been the main contributor to the impressive GDP figures.
Again, at first glance, this all looks dandy. However, there are two big caveats worth mentioning here. The first is that this boom is incredibly narrow. While the AI-adjacent economy might be doing all right, the rest of the South Korean economy isn't in great nick. You can see this clearly if you disaggregate South Korea's production index. While chip production has boomed, the rest of the economy has now been stagnant for basically 3 years.
Furthermore, most of South Korea's AI boom is being driven by just two companies, namely Samsung and SKH Highex. Both companies are now valued at over $1 trillion, or at least they were before Monday's correction, and are expected to rake in $200 billion and $140 billion in operating profit this year, respectively. If these numbers hold up, this would make Samsung the second most profitable company in the world after Nvidia and put SKH Highix comfortably in the top 10 behind only the most profitable US tech companies and maybe Saudi Aramco. If they don't, however, and something goes wrong for either, this could be bad news for the South Korean economy more generally, given that they together account for something like half of the entire Kospi, South Korea's main stock index, and a non-trivial fraction of South Korea's entire GDP.
The second caveat worth mentioning is that parts of the South Korean economy are looking suspiciously bubbly. Obviously, if AI ends up being a bubble, South Korea is very exposed. But even if AI ends up being half it's cracked up to be, the Kospi looks pretty crazy and has now risen by something like 200% in just the past 12 months. Even if you're a die-hard AI bull, it's hard to deny that a 200% rise in barely a year looks pretty precarious. If this is a bubble, and if it does burst, it could be terrible news for the South Korean economy. In part because foreign investors have actually been selling Korean equities this year. 60% of the market is held by domestic investors, which means that a sudden downturn could wipe out Korean savings.
The other bit of the economy that looks a bit bubbly is the housing market. The Korean housing market was already looking bubbly before the AI boom. Korean households were already some of the world's most indebted in the world before the pandemic, and prices surged further during and after COVID. National-level data arguably underestimates the severity of the crisis as well because basically everyone in Korea apparently wants to move to Seoul and the surrounding metropolitan area where houses are even more expensive. Astonishingly, more than half of South Korea's population now lives in greater Seoul, a concentration of people in a single metropolitan area unmatched by any other advanced economy.
The political class knows this is a problem. The president, Yoon Suk-yeol, recently described Seoul's white-hot property market as the fountainhead of all Korea's problems and a ticking time bomb. Unfortunately for Yoon, after a slight correction in early 2023, the AI boom looks like it might reinflate the bubble. This is in part because the stock market boom has made Korean savers richer, at least on paper, and they are, judging by the recent uptick in prices, plowing some of that newfound wealth back into housing. But it's also because of the massive bonuses that both Samsung and SKH Highix are currently paying out to employees.
For context, both companies have recently introduced bonus systems that essentially channel 10% of all operating profits to an employee bonus pool, which is then distributed once a year as a percentage of base salary. As operating profits have skyrocketed, this has led to some insane numbers. SKH Highix's 35,000 employees received a bonus worth on average about $100,000 last year, and that's expected to rise to something like half a million this year. Similarly, the roughly 78,000 employees working in Samsung's chip division are expected to receive an average bonus of about $400,000 this year, meaning that Samsung and SKH Highix will collectively pay out bonuses representing more than 1% of South Korea's entire GDP. This is obviously great news for workers, but chances are that a fair bit of this money will be plowed back into Korea's housing market, reinflating the bubble.
There's evidence this is already happening. House price gains in Yongin, where SK Hynix are currently building their new corporate cluster, accelerated after the company paid out last year's bonuses, with the rebound later spreading towards nearby Dongtan. These bonuses could also put upwards pressure on inflation, which is already running well above target at 3.1%.
Now, the natural policy response here would be to raise interest rates, which should encourage some of this money into cash savings and thus mean less money being plowed into housing and lower inflation. But the problem here is that higher interest rates would also do damage to the non-AI bit of South Korea's economy, which is already struggling. This interaction between our two caveats is the fundamental reason that the Korean economy looks shaky. It's not just that it looks bubbly. It's also that it's too imbalanced for the usual policy remedies to be applied straightforwardly.
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