Gross domestic product expanded 0.6 percent in the April-June period after expanding 1.8 percent in the first quarter.
The Bank of Korea portrayed the moderation as a healthy normalization rather than the start of a slowdown.
"When growth is exceptionally strong in one quarter, it often falls sharply or even turns negative in the next, but the economy continued to expand in the second quarter," said Lee Dong-won, director general of the BOK's Economic Statistics Department II.
From a year earlier, GDP grew 3.7 percent in the second quarter after a 3.8 percent increase in the January-March period, keeping the broader expansion comfortably above the economy's estimated growth potential of around 2 percent.
"Even if quarter-on-quarter growth averages minus 0.1 percent in the third and fourth quarters, annual growth could still reach 3 percent," Lee said.
Annual growth compares the average level of GDP over all four quarters of 2026 with the average for 2025, rather than simply adding quarterly growth rates. The strong gains already accumulated in the first half would therefore cushion modest weakness later in the year.
The BOK's latest official growth forecast, released in May, remains at 2.6 percent, making Lee's 3 percent figure an arithmetic possibility rather than a revised central bank projection. The central bank will update its outlook in August.
If achieved, 3 percent growth would mark South Korea's strongest annual expansion in five years.
The three-year Korean government bond yield was little changed at 3.909 percent, hovering just below the 4.0 percent threshold, while the 10-year yield rose 2.3 basis points to 4.377 percent. The stronger growth figures reinforced expectations that the Bank of Korea could tilt toward a more aggressive pace of monetary tightening.
The Korean won, which opened at around 1,476.6 won per dollar at about 9 a.m., strengthened sharply to around 1,468 after the data release.
Another upside surprise was that the composition of second-quarter growth suggested momentum was not confined entirely to exports.
Domestic demand and net exports each contributed 0.3 percentage point to quarterly growth, contrary to expectations that external demand would account for most of the increase.
Still, stronger exports and chip-facility expansion remained the primary growth engines.
Private consumption remained lackluster, hovering around zero growth. Higher oil prices weighed on passenger-car fuel consumption, but discretionary spending increased on household appliances, department-store goods, clothing, bags and travel, supported by income gains from the stock market and the AI boon.
Beyond the stock market and the semiconductor sector, domestic demand remained broadly subdued, with elevated household debt continuing to weigh on consumer spending.
The AI-driven chip boon, however, boosted the economy's income far more than its output.
Real gross domestic income rose 15.6 percent from a year earlier, its strongest annual gain in 38 years, as semiconductor export prices increased much faster than crude oil import prices.
The widening gap between GDP and GDI indicated that the purchasing power generated by the economy rose much faster than real output, reflecting a sharp improvement in South Korea's terms of trade.
Officials cautioned that more evidence was needed to determine whether the income windfall would feed through to corporate investment, employment and broader household consumption.
Yet the figures also point to an increasingly two-speed economy, with the AI-driven chip boom generating outsized gains in national income while much of the domestic economy continues to struggle under weak consumption, sluggish private demand and elevated household debt.
The second-half trajectory will depend on developments in the Middle East, energy prices and whether the semiconductor upswing broadens beyond favorable pricing into sustained gains in production, exports, investment and domestic demand.
Copyright ⓒ Aju Press All rights reserved.