South Korea Q2 growth cools as chip boom masks weak consumption

South Korea’s gross domestic product likely expanded 0.4 per cent in the second quarter, a sharp deceleration from the 1.8 per cent surge recorded in the first three months of the year. The median forecast from a poll of 24 economists, with estimates ranging from 0.1 per cent to 1.0 per cent, points to a two-speed economy. On a year-on-year basis, growth is expected to ease to 3.5 per cent from 3.8 per cent in the prior quarter.

The primary engine remains the semiconductor sector. June exports jumped 71 per cent, the fastest pace in almost 50 years, driven by a near-200 per cent surge in chip shipments to $44.8 billion. That momentum pushed the country's first-half trade surplus to $138.3 billion, underscoring the direct financial benefit of the global artificial intelligence spending boom.

However, those gains are not broadly distributed across the broader economy. "Exports and investment are two key drivers for Q2 GDP, but domestic demand and consumption growth likely remain weak," said Jeong Woo Park, Asia economist at Nomura. He noted that consumers "looked very conservative about spending because outside chip sectors, other service sectors, manufacturing sectors, they continued to cut jobs." "So because of that, this is very much like a K-shaped growth pattern. I think that limited some possible impacts from strong chip cycles," Park said.

This fractured landscape presents a complex challenge for policymakers navigating inflation and growth. The Bank of Korea raised its benchmark interest rate on July 16, its first hike in three and a half years. Governor Shin Hyun Song indicated the decision was backed by developments in growth, inflation and financial stability. Economists polled prior to the meeting anticipate at least one more rate increase before year-end.

Despite the second-quarter soft patch, the official outlook remains constructive. The finance ministry recently upgraded its full-year growth projection to 3.0 per cent, the highest in five years, though a separate poll of economists suggests a more modest 2.8 per cent average. "The big picture though is that South Korea’s economy looks on track to achieve full-year growth in excess of 3 per cent, led by AI-related tailwinds and supported by signs that spillovers into the wider economy are beginning to materialize," said Khoon Goh, head of Asia research at ANZ.