Forecasts have begun to emerge that Korea's economic growth rate will reach 3% this year. In the early days of the Middle East war, there were concerns that even 2% annual growth would be hard to guarantee, but the mood shifted after the "surprise" first-quarter growth announcement driven by strong semiconductors.
◇ Forecast "1.7%–2%" → after late April "high 2%–3%"
According to Bloomberg on the 4th, JPMorgan Chase predicted that Korea's growth rate this year will reach 3%. That is an increase of 0.8 percentage points (p) from the previous forecast of 2.2%.
Recent forecasts for this year's Korean growth rate by domestic and overseas analytical institutions are generally in the high 2% range. ▲ Citigroup (2.2→2.9%) ▲ Capital Economics (1.6→2.7%) ▲ BNP Paribas (2.0→2.7%) ▲ Goldman Sachs (1.9→2.5%) ▲ ANZ (2.0→2.5%) ▲ Barclays (2.0→2.4%) ▲ Nomura (2.3→2.4%). Hyundai Research Institute also raised its growth rate to 2.7% from 1.9% (September last year's forecast) through its "2026 revised economic outlook" on the 3rd.
This is quite different from the projections released late last year and right after the Middle East war broke out. The government, through its early January economic growth strategy, set a goal of 2% growth this year, and the Bank of Korea raised its forecast from 1.8% to 2% in February. Korea Development Institute (KDI), the ASEAN+3 Macroeconomic Research Office (AMRO), and the International Monetary Fund (IMF) each presented 1.9%. The Organization for Economic Cooperation and Development (OECD) in March even cut its original 2.1% forecast to 1.7%.
◇ Surprise first-quarter GDP growth, strong exports in April as well… war and inflation are variables
The "surprise" first-quarter growth rate announced on the 23rd of last month was the turning point. Real gross domestic product (GDP) growth in the first quarter was 1.7%, the highest in five years and six months since the third quarter of 2020 (2.2%). Strong exports centered on "semiconductors" and better-than-expected domestic demand supported the result. All industrial activity indicators for the first quarter—industrial production, consumption, facility investment, and construction completed work—rose together, the first time since the second quarter of 2023.
Even in April, when the Middle East war was in full swing, the strong export trend continued. Exports in March–April set a new record by exceeding $80 billion for two consecutive months for the first time ever. The trade balance (a surplus of $23.77 billion) was the largest on record for any April and marked a 15th straight month of surplus since February last year. Semiconductor exports, up 173.5% from a year earlier, led the way.
Even if growth in the remaining second through fourth quarters stays at 0% from the previous quarter, calculations show the annual growth rate would reach 2.4%. The government believes that as long as it can fend off "negative growth" in the second quarter, it can hold the line to some extent, and it expects the "high oil price damage support payment," which began to be paid through a supplementary budget, to play that role.
Still, "prolonged war" and "inflation" are variables. If the U.S.-Iran war unfolds into a worst-case scenario, or if international oil prices surge again, the upward trend in growth could quickly reverse. If higher oil prices feed into higher consumer prices, that would erode household real purchasing power and could weaken the recovery in domestic demand. Another point of concern is that the recent strength in exports and growth leans heavily on semiconductors. The first-quarter manufacturing output growth rate (3%) was the largest in about five years, but excluding semiconductors the growth rate was only 0.2%.
The government plans to present a revised annual outlook through its "second-half economic growth strategy" around late June.