South Korea's economy is projected to approach a 3% growth rate this year, bolstered by strong semiconductor exports and a recovery in domestic demand. As the economic recovery strengthens more than expected, the Bank of Korea is anticipated to shift its monetary policy stance and raise the benchmark interest rate twice in the second half of the year.
According to a report by the Capital Market Research Institute titled "2026 Second Half Macroeconomic Outlook and Key Issues," the country's gross domestic product (GDP) growth rate is expected to reach 2.9% this year. This growth is attributed to robust exports, particularly in semiconductors, alongside a significant recovery in equipment investment and private consumption.
In fact, the economy demonstrated a strong growth rate of 1.8% in the first quarter compared to the previous quarter. The average monthly export figures for April and May, driven by information technology (IT) products like semiconductors, reached $86.8 billion, significantly exceeding the first quarter average of $73.5 billion.
The recovery in domestic demand is also expected to become more pronounced. After recording a decline of 1.6% in the fourth quarter of last year, equipment investment rebounded to 6.6% in the first quarter and is projected to increase by 4.9% for the year. Private consumption is expected to rise by 2.5%, surpassing the long-term average of 2.2% from 2010 to 2025, thanks to improved income conditions and consumer sentiment driven by economic recovery and rising stock prices. Construction investment is anticipated to gradually recover after a prolonged period of negative growth.
However, the impact of high oil prices due to the ongoing conflict in the Middle East has been identified as a burden on the domestic economy. The petrochemical industry is facing delays in recovery due to raw material supply issues, while the construction sector is grappling with rising raw material costs and supply chain uncertainties. The automotive industry is also under pressure from reduced exports due to transportation disruptions to the Middle East and parts supply chain issues.
Consumer prices are expected to rise by 2.8% annually. While increased consumption and rising international oil prices will exert upward pressure on prices, the likelihood of a return to high inflation rates like the 5.1% seen in 2022 is considered low. This is attributed to relatively stable prices for grains and non-energy raw materials, as well as a global supply chain disruption that is not as severe as during the pandemic.
Nevertheless, the institute noted that stronger-than-expected economic expansion and recovery in private consumption could increase inflationary pressures, particularly in the personal services sector. Consequently, the Bank of Korea is expected to raise the benchmark interest rate by a total of 0.5 percentage points twice in the second half of the year, shifting its monetary policy toward tightening. Concerns over financial stability due to rising housing prices are also cited as a factor for interest rate hikes.
The institute identified the rekindling of tensions between the U.S. and Iran, delays in the normalization of oil-producing countries' facilities, and a slowdown in global AI investment as major downside risks to the domestic economy. Additionally, it emphasized the need to prepare for a "Higher for Longer" environment, as the global monetary policy landscape shifts from expectations of rate cuts to a focus on combating inflation.
* This article has been translated by AI.
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