South Korea economy likely returned to growth in Q2: Reuters Poll

South Korea's economy is projected to rebound with a 0.5% seasonally adjusted growth in Q2, following a Q1 contraction, supported by a modest export recovery driven by semiconductors and gradual domestic demand, alongside government stimulus. However, the outlook remains uncertain due to the critical risk of a 25% U.S. tariff on South Korean exports if trade negotiations fail by August 1. This potential trade friction has prompted the Bank of Korea to signal possible rate cuts and led economists to lower 2025 growth forecasts.

Analysis

South Korea's economy is showing signs of a fragile recovery, with a median forecast pointing to 0.5% seasonally adjusted GDP growth in the second quarter, reversing a 0.2% contraction from Q1. This rebound is attributed to a modest recovery in exports, which rose 4.3% in June, driven by strong global demand for semiconductors, and a gradual improvement in domestic consumption. The recovery is further supported by significant government fiscal stimulus, including a 13.8 trillion won supplementary budget and a larger 31.8 trillion won package whose effects on consumption are expected to materialize in the third quarter. However, this nascent recovery is overshadowed by substantial uncertainty and downside risks, reflected in the moderately negative sentiment score. The primary threat is the outcome of trade negotiations with the United States, with a potential 25% tariff on South Korean exports looming if a deal is not reached by the August 1 deadline. This risk is compounded by recent weakness in exports to key markets, with shipments to the U.S. and China falling for the third and second consecutive months, respectively. In response to this uncertainty, the Bank of Korea has signaled a dovish pivot, with a majority of board members indicating a probable interest rate cut within the next three months, leading economists to downgrade the 2025 growth forecast to 0.9%.

Key Decisions for Investors

• Investors with exposure to South Korean assets should closely monitor the outcome of U.S. trade negotiations, as the August 1 deadline represents a significant binary risk event for equities and the Korean Won.
• Consider a barbell strategy, remaining cautious on export-oriented sectors with high U.S. exposure while looking for opportunities in domestic consumer-focused companies poised to benefit from the government's 31.8 trillion won stimulus package.
• Anticipate a potential interest rate cut by the Bank of Korea in the coming months, which could place further pressure on the currency but may support domestic bond prices and rate-sensitive equities.
• The article's headline regarding Trump Media (DJT) should be disregarded as it is entirely unsubstantiated by the body of the text, which focuses exclusively on the South Korean macroeconomic outlook.