[Market Pulse]Korea's Economic Outlook for 2026 Remains Difficult to Predict

The Korea Institute for Industrial Economics and Trade recently released its economic and industrial outlook for 2026. By combining macroeconomic analysis with the current state of Korea’s key industries, the institute forecasted next year’s economic growth rate at 1.9%. The International Monetary Fund, Korea Development Institute, and Bank of Korea projected a growth rate of 1.8%, while the Korea Institute of Finance offered a slightly higher estimate of 2.1%, but the differences are not significant. Compared to several months ago, more optimistic forecasts have emerged, and some private institutions have predicted even higher growth rates, citing the recent strong export performance. However, given both domestic and international economic conditions and the reality facing Korean industries, the outlook remains challenging.

The annual growth rate for 2025 is estimated at 1%, with the rate dropping to 0.3% in the first half of the year but rebounding in the second half thanks to government measures to support consumption and improvements in the global IT market. Achieving 700 billion dollars in exports, once considered difficult, now appears increasingly possible. This rebound is expected to continue into the first half of next year, with a projected growth rate of 2.2% for that period. However, from the second half onward, a slight downward stabilization trend is anticipated, as there is a lack of momentum to sustain the current export boom for an extended period.

Just half a year ago, many were concerned that the Trump administration’s reciprocal tariffs would severely impact the global economy and Korea’s exports. So far, however, the shock has not been as severe as expected. This is due to front-loading-where buyers make purchases in advance of tariffs-and the stronger-than-anticipated boom in artificial intelligence investment. The increase in AI investment has supported the U.S. economy and sharply boosted demand for semiconductors, providing a tailwind for Korea as well. However, the effects of tariff hikes are gradually becoming apparent, as evidenced by a 12% year-on-year decline in exports to the United States in August. For now, increased exports to regions outside the United States are compensating for this, but it remains to be seen how long this will last. Depending on the extent, a downward trend in both the U.S. and global economies could take hold in earnest.

By industry, prospects are expected to be quite mixed. Exports from Korea’s 13 major industries increased by 2.1% in 2025, primarily thanks to a 16.6% surge in semiconductor exports. Excluding semiconductors, only shipbuilding and biohealth performed well, while the rest of the manufacturing sector saw declines in both exports and production. In particular, steel and petrochemicals suffered significant setbacks, with production falling by over 4% due to weak domestic demand and competition from Chinese products. Industries heavily reliant on exports to the United States, such as automobiles and general machinery, are also beginning to feel the effects of a worsening tariff environment. This trend is expected to continue into 2026. However, as the slump in private consumption and construction investment-which had previously dragged down domestic demand-shows signs of improvement, some cushioning effect may be expected.

There have been frequent criticisms that Korea’s key industries are losing competitiveness and that dependence on semiconductors is excessively high. Thanks to the AI investment boom, the share of semiconductors in exports is once again approaching the all-time high of 25%, and is expected to rise further next year. While it is fortunate to have semiconductors as a growth engine, heavy reliance on a specific industry-especially one subject to significant cyclical changes-increases economic uncertainty and risk. It also has the effect of masking the urgency of the crisis facing the broader Korean industrial sector. While a general stabilization trend is forecast for the overall economy, 2026 is likely to become a pivotal year in determining the direction of Korea’s economy and industry.

Kwon Namhun, President of the Korea Institute for Industrial Economics and Trade

This content was produced with the assistance of AI translation services.