Economic growth eases in the second quarter of 2026

GDP growth exceeds expectations: Korea's GDP grew 0.6% in seasonally adjusted quarter-on-quarter terms in Q2, following 1.8% growth in the previous quarter. Although marking a deceleration, the Q2 reading came in above market estimates. In annual terms, economic output grew 3.7% in Q2, following 3.8% growth in the prior quarter.

Growth remains K-shaped: Compared with the prior period's data, figures in Q2 worsened for private consumption (+0.4% in seasonally adjusted quarter-on-quarter terms vs +0.6% in Q1), fixed investment (+0.8% vs +2.9% in Q1), exports of goods and services (+1.4% vs +5.9% in Q1) and imports of goods and services (+0.8% vs +3.9% in Q1). In contrast, the reading for government spending improved in Q2 (+0.2% vs -0.4% in Q1). The broad-based slowdown in Q1 largely reflected payback after exceptionally strong growth in the prior quarter. On a positive note, intellectual investment accelerated sharply, driven by higher semiconductor capex on design and development of software, advanced memory chips and next-generation process nodes. Moreover, import growth weakened as the Iran conflict reduced oil imports. On a less positive note, consumption growth underperformed, softening despite fiscal support and wealth effects due to the exceptional performance of the Korean stock market.

GDP growth to remain lopsided: Our Consensus is for economic growth to soften further in sequential terms following the Q2 outcome. Higher interest rates and still above-target inflation will likely dent private spending. That said, economic momentum should continue to receive support from robust AI-driven demand and capital expenditure. Turning to risks, tighter financial conditions and deteriorating risk sentiment could slow the AI investment cycle, removing a key tailwind for South Korea's exports. In addition, any escalation in US-Iran tensions that prolongs shipping disruptions through the Strait would further weigh on the already weak construction sector.

Panelist insight: Commenting on the risks to the GDP outlook, United Overseas Bank’s Ho Woei Chen said: “The re-escalation in Middle East conflicts, tightening financial conditions and pullback in the stock market from record highs may weigh on the sentiment going forward. Investment is expected to stay firm on the realization of capex. This includes the government’s mega AI investment plan with KRW880 tn (USD590 bn) from the country’s two largest memory chipmakers.”

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