2.7% (2022)→1.6% (2023)→2.0% (2024)→1.0% (2025)→? (2026)
Since 1953, when Korea began compiling gross domestic product (GDP) statistics, will the Korean economy, stuck for the first time in three straight years of sub-2% low growth, rebound in 2026? Whether the strong energy of byeongo year (丙午年), the "year of the red horse," can lift Korea's economy, views among domestic economic research institutes diverge.
The Bank of Korea (BOK), Korea Development Institute (KDI), and Korea Institute for Industrial Economics & Trade (KIET) projected 1.8%–1.9% growth, while the Korea Institute of Finance predicted 2.1%. The average 2026 growth forecast for Korea compiled by the International Finance Center from eight global investment banks (IBs) was 2.0%, with Nomura (2.3%) and Barclays (2.1%) in particular raising expectations for growth above 2%. While the Central Bank and state think tanks offered a conservative view that growth would remain in the high 1% range, private research institutes and IBs closer to financial markets projected growth above 2%, exceeding the potential growth rate.
"From exports to domestic demand"… shift in growth engine
Views split on whether "2% growth" is possible, but research and forecasting institutions broadly agree that Korea's GDP growth rate, which retreated to 1.0% in 2025, is likely to recover to the level of the estimated potential growth rate in the high 1% range. Korea's recovery in 2026 is expected to be led by △ a rebound in construction investment △ an increase in private consumption driven by expansionary fiscal policy △ a semiconductor boom.
As the Donald Trump administration's 15% reciprocal tariff takes full effect in the United States, the main driver of economic growth is expected to shift from exports to domestic demand. The Bank of Korea (BOK) said, "As the recovery in consumption continues and construction weakness eases, growth will expand centering on domestic demand," adding, "Exports could slow due to the impact of U.S. tariffs, but semiconductors should show a solid trend." Specifically, the contribution of domestic demand to growth, which was -0.4–0.5 percentage point in 2025, is expected to rise to 1.1–1.4 percentage points in 2026, while the contribution of exports over the same period is expected to fall from 0.7–1.3 percentage points to 0.4–0.8 percentage point, according to the BOK.
The recovery in domestic demand is expected to be driven by expansionary fiscal policy. The 2026 government budget was set at 727.9 trillion won, up 8% from a year earlier. The budget growth rate is more than double the Yoon Suk-yeol administration's average (3.7% over three years). The Korea Institute of Finance said, "The government consumption growth rate, which slowed to an annual average of 2.0% in 2023–2024, will recover to the 4% range in 2026, the pre-COVID-19 pandemic average," adding, "Based on accommodative fiscal and monetary policy, the recovery in private consumption will continue."
In particular, construction investment, which has fallen for five consecutive years since 2021 right after the COVID-19 pandemic, is expected to increase 2.2%–2.7% in 2026, rebounding to "plus (+) growth," which should bolster the recovery in domestic demand. Following the Ukraine-Russia war, soaring construction material prices and delays in resolving real estate project financing (PF) distress after the 2022 Legoland crisis led to a prolonged decline in project orders, which are expected to partly recover in 2026. Base effects from the 2025 construction investment decline of about -9% to -8% are also reflected. The Korea Institute for Industrial Economics & Trade (KIET) said, "Thanks to stabilized construction material costs and expanded government expenditure on social overhead capital (SOC), the sector is likely to escape its decline for the first time since 2020, but the accumulation of unsold dwellings after completion and a decrease in move-in volumes will act as constraints."
U.S. tariffs cushioned by semiconductor boom… AI bubble debate a variable
According to the Bank of Korea (BOK), global trade growth is expected to slow from 3.6% in 2025 to 2.4% in 2026. Accordingly, Korea's total export growth rate is also expected to retreat from 2.9% to 1.4% over the same period. However, the BOK estimated the 2026 current account surplus at $130 billion (about 192 trillion won), more than 10% higher than the 2025 forecast.
Despite slower exports, the current account surplus is set to grow sharply due to a surge in demand for Korean memory semiconductors driven by global investment in artificial intelligence (AI). With demand rising, a prolonged increase in DRAM prices is expected to lift major domestic semiconductor corporations' DRAM sales in the fourth quarter of 2026 to 3.5 times those of the first quarter of 2024. The Bank of Korea (BOK) said, "If solid semiconductor demand continues with the spread of AI and the U.S. tariff on semiconductor items slated for the latter half of the new year is put on hold, semiconductor export growth will approach the mid- to high-10% range of 2025," adding, "In that case, Korea's GDP growth rate would be lifted by 0.2 percentage point in 2026 and 0.3 percentage point in 2027."
On the other hand, if the AI bubble debate materializes and related investment adjusts, slower semiconductor exports would drag down growth in 2026 and 2027 by 0.1 percentage point and 0.3 percentage point, respectively.
"Rising exchange rate → inflation jitters… constraints on recovery"
The most important variables for a recovery in the 2% range in 2026 are the exchange rate and price stability. Above all, the key is for the won-dollar exchange rate, which as of December 2025 is threatening to break 1,500 won, to stabilize downward. The won jumped to the high-1,400-won level per dollar right after the Dec. 3, 2024 emergency martial law, then fell to 1,350 won by late June 2025 after the launch of the Lee Jae-myung administration, but climbed back into the 1,400-won range after late September, topping 1,480 won intraday on Dec. 17. The combined factors were △ expanded Government Bonds issuance due to the Lee administration's expansionary fiscal policy △ the burden of capital outflows stemming from a $350 billion U.S. investment fund △ the rising trend of overseas investment by Korean retail investors trading U.S. stocks, among others. Contrary to earlier expectations that the won-dollar rate would fall below 1,400 won as the Federal Reserve's three straight rate cuts narrowed the Korea-U.S. rate gap, won weakness has instead steepened. Since October 2025, the global dollar has been weak, but the won has failed to turn strong. To slow the pace of the won-dollar rise, the government resumed strategic currency hedging for the National Pension Service's overseas investments and extended a $65 billion (about 96 trillion won) foreign exchange swap with the Bank of Korea (BOK), but the effect was limited.
If the upward trend in the exchange rate does not stop, the domestic demand–driven recovery engine could be blunted. A weaker won can raise consumer price pressures through higher import prices and restrain the recovery in private consumption via reduced disposable income. If this trend overlaps with aggregate demand stimulus from expansionary fiscal policy, consumer price instability could intensify. The room for maneuver in monetary policy, which should support recovery, could narrow. The general view in economics is that in phases where the exchange rate and prices rise together, it is difficult to stimulate the economy by cutting interest rates.
In fact, at a briefing on Dec. 17, 2025, to review the operation of the inflation-targeting framework, the Bank of Korea (BOK) raised its 2026 consumer price inflation forecast to 2.1%. It adjusted the 2.0% outlook it had presented just 20 days earlier on Nov. 27. It also warned that if the recent won rate around 1,470 per dollar persists for a considerable period, next year's consumer price inflation could rise to 2.3%. An economist at a financial firm said, "The BOK raising its consumer price inflation forecast in just 20 days acknowledges that the recent exchange rate rise is not in a situation that can easily stabilize," adding, "The speed and magnitude of the won's weakness are becoming the biggest variables for the new year's recovery."