[Financial Microscope] "Semiconductors Beat the War" Fuel Rosy Outlook... Key Checkpoints for South Korea's Growth Rate This Year

South Korean Growth Forecast Upgraded to 3.0% by the Market

Virtuous Cycle Expected: Semiconductor Export and Investment Expansion to Boost Consumption

Government’s Supplementary Budget and Stimulus Stance to Counter Growth Slowdown Pressure

The "semiconductor surprise" has driven a remarkable first-quarter growth in South Korea's gross domestic product (GDP), prompting a wave of optimistic forecasts for the country's economic growth rate this year. While it remains difficult to gauge the extent of the negative impact that the Middle East war will have on the economy in 2026, many experts believe that booming exports and increased investment, especially in semiconductors, will more than offset these risks.

However, there are growing calls in the market to be cautious about the "net export illusion" effect. In a situation where imports are being disrupted due to the blockade of the Strait of Hormuz, export figures have reflected soaring prices driven by existing inventories, leading to a potentially significant short-term improvement in statistics. From a longer-term perspective, experts pointed out that Korea must also prepare for the possibility of a sharp slowdown in economic growth once the semiconductor boom ends.

This Year’s Growth Rate Raised to as High as 3.0% by the Market

According to the financial investment industry on the 29th, major overseas investment banks have recently raised their forecasts for South Korea’s economic growth rate this year to as high as 3.0%. JP Morgan revised its forecast upward by 0.8 percentage points from 2.2% to 3.0%. Citi also increased its projection from 2.2% to 2.9%, up by 0.7 percentage points. Domestic forecasts are also optimistic. Samsung Securities and KB Securities have each raised their forecasts for Korea’s growth rate this year to 2.7%, while Meritz Securities lifted its projection to 2.6%.

After the surprise 1.7% growth rate in the first quarter (quarter-on-quarter, preliminary figure), the prevailing view is that even with a conservative outlook, the government and Bank of Korea's original 2.0% forecast will be achieved. This is a marked contrast to earlier expectations that Korea’s economic growth rate would fall below the Bank of Korea’s forecast (2.0%) due to the impact of continued war in the Middle East and high oil prices.

Lee Junghoon, economist at Daishin Securities, said, “The first-quarter GDP growth surprise was led by semiconductor exports, but the cause is not just limited to semiconductors. The key point is that multiple sectors, such as private consumption (0.5%), construction investment (2.8%), and facility investment (4.8%), all grew evenly.” Kwanghyuk Choi, researcher at LS Securities, also commented, “While the boom in the semiconductor industry and the resulting increase in net exports played a positive role in growth, the recovery in domestic demand is also an important change from the perspective of growth stability.”

Market participants noted that, despite the ongoing effects of the war, domestic conditions for exports and investment, supported by advanced technology investment policies, remain favorable for the economy. In particular, they expect that the increase in semiconductor exports will lead to expanded facility investment, which in turn will boost consumption through wage and stock price increases. This virtuous cycle is expected to even strengthen government fiscal capacity by increasing corporate tax revenues. The government’s supplementary budget and pro-growth stance are also seen as supporting the economy against downward pressures.

Beware of Net Export Distortions and Deepening Semiconductor Dependency

However, there are warnings that "net export distortions" must be carefully considered when assessing economic growth this year. According to trade data for March, petroleum product exports rose by 54.9% due to higher unit prices from surging oil prices, while crude oil imports fell by 5.2% as the blockade cut import volumes despite rising unit prices. This led to an increase in net exports. Kyuyoun Jeon, economist at Hana Securities, noted, "Given that disruptions in crude oil import volumes became more pronounced from April, the distortion in Korea’s net exports could persist until the Strait of Hormuz is reopened. The contribution of net exports is expected to deteriorate sharply after the reopening."

The impact of the Iran war on household consumption has so far been limited. With the government introducing a cap on petroleum prices, retail gasoline prices in Korea at the end of March only rose 12% compared to the end of February. Jemin Choi, economist at Hyundai Motor Securities, pointed out, "Strong growth in financial sectors due to a bullish stock market, and improvements in the culture and other service sectors from events like the BTS comeback, also contributed to the first-quarter GDP surprise, but these factors could partially reverse in the second quarter." He added, "In the construction sector, sluggishness has been partially alleviated by an increase in public sector groundbreakings and the resumption of reconstruction projects, but considering cost increases due to the Middle East war and the trend in construction orders as a leading indicator, a sustained recovery seems unlikely."

From a longer-term perspective, it is also important to note that both domestic demand (investment) and exports are highly dependent on the semiconductor sector. Jinyi Ryu, economist at KB Securities, said, "There is considerable uncertainty about whether growth will remain sustainable next year and the year after," and diagnosed, "Given that the recent investment cycle related to artificial intelligence (AI) is relatively less sensitive to the economic cycle or inflation, the prevailing view is that as long as the semiconductor industry remains strong, Korea’s economic growth rate will stay high. However, this at the same time implies that when the semiconductor upturn ends, Korea could experience a sharp slowdown in economic growth."

In reality, Korea’s potential growth rate—which indicates the actual economic performance achievable without inflation—has fallen to the 1% range. The Organisation for Economic Co-operation and Development (OECD) projects Korea’s potential growth rate at 1.71% this year, and an even lower 1.57% next year.

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