The ongoing investment boom in artificial intelligence continues to fuel semiconductor demand, solidifying its position as the most crucial growth pillar for the South Korean economy. The second quarter's GDP once again surpassed expectations, indicating that the export engine, centered on memory chips, continues to provide support for this export-oriented economy.
Preliminary data released by the Bank of Korea on Thursday showed that South Korea's second-quarter GDP grew by 3.7% year-on-year, exceeding market expectations of 3.5%. Quarter-on-quarter growth was 0.6%, also higher than the anticipated 0.4%. Exports were the primary driver, with overseas demand for semiconductors, machinery, and equipment remaining robust.
Following the data release, the market reacted positively. The South Korean won strengthened against the US dollar, with USD/KRW falling approximately 0.58%. The benchmark KOSPI index rose about 1.82%, as investor confidence in export and corporate earnings prospects improved. South Korean memory chip giants like Samsung Electronics and SK Hynix continue to benefit from the global wave of AI infrastructure investment.
However, the second-quarter growth rate decelerated compared to the first quarter, and consumption and construction investment remained weak. With the Bank of Korea initiating an interest rate hike cycle in July, whether chip exports can continue to offset the impact of weakening domestic demand and rising financing costs will become a key factor determining the economy's subsequent performance.
Export Growth Driven by Semiconductors and Equipment
Data from the Bank of Korea indicates that second-quarter exports grew 1.4% quarter-on-quarter, with semiconductors, machinery, and equipment being the primary contributors. The acceleration of global AI infrastructure construction is driving increased procurement demand for high-performance memory chips, directly translating South Korea's advantages in the related supply chain into export growth.
Memory chip suppliers like Samsung Electronics and SK Hynix are the main beneficiaries of this demand expansion. For South Korea, chip exports have become more than just an indicator of a single industry's health; they are now a crucial variable affecting overall economic growth, corporate investment, and foreign exchange market performance.
The continued positive export growth in the second quarter also indicates that the stimulative effect of AI-related capital expenditure on South Korea's real economy persists. Although the export growth rate has moderated from previous highs, demand for semiconductors and equipment still provides relatively stable external support for the economy.
Previously, Goldman Sachs noted in a May research report that South Korea's AI-related exports could approach 30% of GDP by 2026, with the current account surplus exceeding 10% of GDP. The South Korean government recently raised its full-year growth forecast from 2% to 3%.
GDP Exceeds Expectations, but Growth Momentum Moderates
Year-on-year, South Korea's second-quarter GDP grew by 3.7%, slightly lower than the first quarter's 3.8%. Quarter-on-quarter, the 0.6% growth rate was also below the first quarter's 1.8%. This signifies that the economy is still expanding, but the pace of growth has slowed compared to the beginning of the year.
The main pressure for the slowdown stems from domestic demand. Second-quarter private consumption grew by only 0.4% quarter-on-quarter, while construction investment fell 0.2% quarter-on-quarter. Weak consumer sentiment and a cooling real estate market continue to limit the contribution of domestic demand to the economy.
The divergence between strong exports and weak domestic demand remains pronounced. The prosperity in the semiconductor sector has improved foreign trade and corporate performance, but consumption and construction investment have not yet shown concurrent improvement, keeping the economy's reliance on external demand at a high level.
Following the release of first-quarter GDP, the Bank of Korea previously warned of a "K-shaped" economic structure, where tech sector prosperity disproportionately benefits high-income groups. Excluding the IT sector, the annual economic growth rate would be 0.4 percentage points lower. The weakness in consumption and investment in the second quarter extends this structural characteristic, suggesting the "trickle-down effect" of the chip boom on the broader economy remains to be fully realized.
Policy Dilemma: Rate Hikes Gain Data Support, but Divergence Creates a Balancing Act
For the Bank of Korea, the better-than-expected second-quarter GDP provides post-hoc validation for its July decision to raise interest rates. With inflation still above target and the spillover effects of the chip boom beginning to spread to wages and consumption, the data foundation for maintaining a tightening stance has become more solid.
However, the simultaneous weakness in private consumption and construction investment also implies that the central bank must find a more delicate balance between "curbing inflation" and "avoiding excessive suppression of domestic demand" in its future rate hike pace. Governor Rhee Chang-yong has explicitly warned that the spillover effects from the chip boom could lead to more persistent inflation beyond the tech sector. June's CPI remained high at 3.2%, and with the US-Korea interest rate differential around 200 basis points, the structural pressure on the won is difficult to fundamentally alleviate in the short term.
For investors, the core signal from the second-quarter GDP data is that the growth narrative of the South Korean economy remains dominated by AI semiconductor exports. However, tightening macro policy and weak domestic demand are forming new constraints. This combination of "high growth, tight monetary policy, and weak domestic demand" will test the resilience of the South Korean economy and the deftness of its policymakers.
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