Seoul: The South Korean economy is showing gradual recovery in industrial production, led by the growth of domestic consumption, despite the continued weakness of the construction sector, a state-run think tank said Monday.

According to Yonhap News Agency, "Although the construction sector has remained weak for an extended period, consumption continued to improve as the effects of interest rate cuts gradually took hold, supported by government policies," the Korea Development Institute (KDI) stated in its monthly economic assessment report. "Consequently, a strong performance in the service sector has helped drive a moderate increase in overall industrial production."

In October, overall industrial output decreased 3.6 percent due to a fewer number of business days caused by the extended Chuseok holiday. This year, the fall harvest Chuseok holiday fell in early October, unlike in 2024 when it fell in September. The combined industrial output for September and October expanded 1.6 percent on-year, posting mild growth, the KDI reported.

In detail, construction output sharply fell by 14.2 percent in the September-October period. Manufacturing and mining output gained 1.6 percent, as semiconductor production soared 14.6 percent on-year, offsetting losses in the automobile, machinery, and other sectors. The output of the automobile and machinery industries declined 2.2 percent and 3.8 percent, respectively.

Service output grew 3.6 percent, led by the growth of the healthcare, social welfare, and financial sectors. In line with the recovery of the service sector, retail sales went up 1.3 percent on-year in the September-October period, with the consumer sentiment index remaining at a relatively high level of 112.4.

The KDI attributed the improvement in consumer sentiment to falling interest rates and government-led stimulus measures, including consumption coupons. The KDI noted that exports showed a modest upward trend in November, as the strong performance in semiconductors was offset by weak demand for other items.

South Korea's exports increased 8.4 percent from a year earlier in November to over US$61 billion, as chip and auto exports jumped 38.6 percent and 13.7 percent on-year, respectively. "Although follow-up tariff negotiations between Korea and the U.S. have been concluded, uncertainties in the trade environment persist, as the U.S. Supreme Court has yet to rule on the legality of reciprocal tariffs," the KDI stated.

The think tank also warned that the robust performance of the semiconductor sector appears to be led by a sharp increase in chip prices, and in terms of export volume, the growth is gradually tapering off.