As political instability diminishes, the South Korean economy is reviving. The real gross domestic product (GDP) increased by the largest margin in five quarters in the second quarter, overcoming the shock of negative growth in the first quarter. The recovery of domestic demand due to the resolution of political uncertainties and an increase in exports contributed to this. The possibility of achieving 1% annual growth this year is now in sight. The Bank of Korea anticipates that if the growth rate averages 0.8% in the third and fourth quarters, 1% growth can be achieved.
According to the 'National Income (Preliminary)' report released by the Bank of Korea on the 24th, the real GDP for the second quarter increased by 0.6% compared to the previous quarter. The quarterly GDP growth rate showed a continued slowdown until the second quarter of last year (-0.2%), the third quarter (0.1%), the fourth quarter (0.1%), and the first quarter of this year (-0.2), but finally broke out of the sluggish trend. The increase is the largest since the first quarter of last year (1.2%).
◇ 0.6% growth rate in the second quarter… surpassing the Bank of Korea's forecast of 0.5%
The second quarter result slightly surpassed the Bank of Korea's growth forecast of 0.5% presented last May. With the resolution of political instability, consumer sentiment has recovered, and exports have continued to increase, thus boosting the growth rate. Lee Dong-won, director of the Economic Statistics Division at the Bank of Korea, noted, "The rebound in the second quarter growth rate is mainly due to exports showing favorable trends due to the strong semiconductor market and the recovery of private consumption, which had declined in the previous quarter, amid the resolution of domestic political uncertainties."
In the second quarter, private consumption increased by 0.5% as consumption of goods (such as vehicles) and services (such as culture and healthcare) both rose. Government consumption also grew by 1.2%, marking the highest growth since the fourth quarter of 2022 (2.3%). Construction investment decreased by 1.5%, marking the fifth consecutive quarter of decline; however, the decrease was halved compared to the first quarter (-3.1%). Equipment investment also fell by 1.5%, expanding its decline compared to the previous year (-0.4%).
Another key component of GDP, net exports (exports minus imports), also increased significantly. Both exports and imports rose, but exports increased at a greater rate. Exports in the second quarter rose by 4.2%, while imports increased by 3.8%. This marks the largest increase since the third quarter of 2020 (14.6%) and the first quarter of 2023 (4.0%). Exports were primarily driven by semiconductors and petrochemical products, while imports increased mainly in the energy sector (crude oil, natural gas).
These trends were reflected in the contribution of each component to growth. In the first quarter of this year, domestic demand lowered GDP growth by 0.5 percentage points, while net exports increased it by 0.2 percentage points. In the second quarter, the contributions from domestic demand and net exports improved to 0.3 percentage points, respectively. Breaking it down further, private and government consumption contributed 0.2 percentage points each, while construction investment contributed -0.2 percentage points and equipment investment contributed -0.1 percentage points. Compared to the previous quarter, private consumption improved by 0.3 percentage points, government consumption by 0.2 percentage points, and construction investment by 0.2 percentage points, while equipment investment worsened by 0.1 percentage points. The contribution of net exports increased from 0.2 percentage points to 0.3 percentage points.
Jo Yong-gu, a researcher at Shinyoung Securities, stated, "While the Bank of Korea anticipated the contribution of net exports for the year to be 0 percentage points, it was recorded at 0.3 percentage points in the second quarter, confirming the recovery of exports," while adding, "The impact of the U.S. tariff policy being delayed and the strong performance of semiconductors appears to have been significant." He remarked that "within the domestic economy, the worst government expenditure and private consumption during the state of emergency have improved, contributing to the recovery of growth."
◇ Interest in Korea-U.S. tariff negotiations… focus on the impact of the second supplementary budget
As the second quarter growth rate surpassed expectations, the market is focusing on the possibility of achieving an annual growth rate of 1%. Major foreign investment banks (IBs) have already raised their growth forecasts for Korea. According to the International Financial Center, the average economic growth forecast for Korea from eight major IBs has increased from 0.8% at the end of May to 0.9% at the end of June. Barclays (1.1%), Bank of America Merrill Lynch (1.0%), and UBS (1.2%) have each revised their forecasts upwards.
The Bank of Korea has maintained a cautious stance regarding the upward revision of growth forecasts. Director General Lee stated, "There remains uncertainty regarding U.S. tariffs," adding that "if factors such as the second supplementary budget and psychological recovery contribute, domestic demand may improve, but from the third quarter onward, the impact of U.S. tariffs could negatively affect imports and exports."
According to the Bank of Korea, to achieve a 1% growth rate for the year, growth must average above 0.8% in the second half of the year. The Bank of Korea had projected growth of 0.7% in the third quarter and 0.6% in the fourth quarter in its economic outlook released last May. The effects of the second supplementary budget, which passed the National Assembly earlier this month, could contribute to a rise in the growth rate, but it is uncertain whether it will exceed an average of 0.8%. The Director General added, "It is difficult to predict that level and we need to see the effects of the second supplementary budget."
There are voices in the market suggesting that the results of the tariff negotiations with the United States should be closely monitored. The U.S. government has notified that it plans to impose a 25% tariff on products produced in Korea starting from the 1st of next month. Kim Seong-su, a senior researcher at Hanwha Investment & Securities, remarked, "The actual tariff rate is likely to be lower than this," adding, "If the supplementary budget lifts growth by about 0.2 percentage points, achieving 1.1% growth this year is possible."
The Bank of Korea is scheduled to announce a revised economic outlook at the Monetary Policy Committee meeting on the 28th of next month. In the previous revised economic outlook announced in May, the growth rate was expected to be 0.8%; however, there are possibilities of a slight adjustment reflecting domestic and external conditions. Previously, the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) projected Korea's growth rate to be 1.0% this year.