South Korea's economy experienced a robust rebound at the start of the year, propelled by a surge in exports driven by global demand for artificial intelligence technology. Data released by the Bank of Korea on Thursday showed the nation's gross domestic product (GDP) grew 1.7% quarter-on-quarter in the first quarter. This not only reversed the contraction seen in the fourth quarter of 2025 but also marked the fastest growth rate since the third quarter of 2020. The figure significantly exceeded the 0.9% growth forecast by economists in market surveys, surpassing even the most optimistic predictions.
"While upside risks exist, the actual data is much stronger than expected," said Cho Yong-gu, a fixed-income strategist at Shinyoung Securities Co. "Net exports performed strongly, benefiting from the semiconductor cycle, which is similar to what we are observing in Taiwan."
Less than half an hour before the Bank of Korea released the better-than-expected GDP data, SK Hynix reported that its quarterly profit had increased fivefold, primarily fueled by soaring prices for memory chips that support the global AI boom. Taiwan's economy appears even hotter, with data this week showing export orders surging at their fastest pace in 16 years, indicating sustained strong demand.
However, risks remain for South Korea's economic outlook. Growth momentum has been volatile over the past few quarters. Consumer confidence fell to a 10-month low in March, as the war in Iran clouded the outlook for growth and prices. The de facto blockade of the Strait of Hormuz has triggered a spike in global energy prices, raising import costs for the fuel-dependent economy. A weakening Korean won has exacerbated these pressures, sparking market concerns that inflation could accelerate in the coming months. The won depreciated more than 5% against the U.S. dollar in the first quarter, making it the worst-performing currency in Asia.
The Bank of Korea stated that first-quarter exports grew by 5.1%, mainly driven by increased semiconductor shipments, while imports rose by 3%, largely due to higher imports of machinery, equipment, and automobiles. Analysts pointed out that semiconductor exports surged 139.1% year-on-year during the period, with the growth rate more than tripling compared to the previous quarter. Overall monthly export growth reached its highest level since 2021.
Private consumption increased by 0.5% quarter-on-quarter, up from 0.3% in the prior quarter, while government spending growth slowed to 0.1%. Construction and facility investment rose by 2.8% and 4.8%, respectively.
Uncertainty persists as the Bank of Korea adopts a data-dependent approach to policy while assessing the potential impact of geopolitical turmoil. In his inaugural speech on Tuesday, new Governor Shin Hyun Song stated that uncertainty regarding the path of inflation and growth has increased significantly. He added that structural challenges should no longer be viewed merely as external constraints but as key components of the "central bank's operating environment."
Previous data showed that Korean import prices recorded their largest increase in nearly 30 years last month, pushing overall consumer inflation back above the central bank's 2% target. Raw material costs soared more than 40%, led by crude oil and energy-related products. President Lee Myung-bak has implemented fuel price caps and cuts in fuel taxes to curb the rapid rise in prices for gasoline, diesel, and kerosene, aiming to alleviate pressure on businesses and households. These measures are intended to mitigate the inflationary impact of soaring energy costs.
On the production side, manufacturing output grew by 3.9% quarter-on-quarter, led by computers, electronics, and optical products. Electricity, gas, and water supply increased by 4.5%, construction output rose by 3.9%, and agriculture, forestry, and fisheries grew by 4.1%.
Shinyoung's Cho noted that the first-quarter data, being substantially stronger than expected, could boost full-year growth prospects. A higher starting point means the full-year result will be more favorable even if momentum moderates later. "Concerns about growth have clearly eased," he said.
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