Chip upcycle, easing oil-related pressures to boost consumption in 2027: KDI

The global semiconductor upcycle, coupled with easing pressure from higher oil prices, is expected to lead to stronger consumption next year, a state-run think tank projected Thursday.

The outlook came amid assessments that this year's global chip upcycle, driven by the artificial intelligence (AI) boom, has had a limited impact on domestic consumption due to the gradual spillover of its benefits, while higher oil prices have weighed more immediately on the room for spending.

"Next year, the negative impact of oil price hikes is expected to gradually weaken, while the positive impact of the chip upcycle spreads, leading to stronger consumption compared with this year," the Korea Development Institute (KDI) said in a report.

The KDI said bonuses and dividends paid by major chipmakers could also provide additional momentum for domestic consumption, although geopolitical uncertainties in the Middle East may pose some downside risks.

Amid the potential challenges, the KDI advised the government to refrain from measures aimed at stimulating short-term spending and instead focus on improving employment and income conditions to lay the groundwork for a sustainable recovery in consumption.

"With the recovery in consumption expected to gradually gain momentum next year, there may be limited need for additional measures to stimulate demand across the entire economy," the KDI said.

The think tank also warned that as the recovery relies heavily on a single sector, namely semiconductors, consumption could become overly dependent on the chip industry cycle.

"To achieve a sustainable recovery in consumption, South Korea needs to bolster the productivity of industries other than chips, improve employment and wage conditions, and broaden the foundation for a recovery in consumption," it added.