AI chip demand boosts exports, South Korea's Q2 GDP beats expectations, fueling rate hike prospects

According to Odaily, driven by an AI-powered chip export boom, the South Korean economy recorded higher-than-expected growth in the second quarter, providing support for further rate hikes by the central bank. Data released by the Bank of Korea on Thursday showed that GDP grew by 0.6% quarter-on-quarter in the three months to June, compared to a 1.8% increase in the previous quarter. This reading was above the 0.4% median forecast of economists surveyed by the market.

Although it was a slowdown from the stellar performance in the previous quarter (the fastest growth rate since the end of 2021), the latest data continues the recent trend of repeated upside surprises, prompting the government, the central bank, and the International Monetary Fund to raise South Korea's economic growth outlook multiple times.

This strong performance will support central bank officials in considering further rate hikes in the coming months. The Bank of Korea just conducted its first rate hike since 2023 last week. A recent survey of economists showed that the market expects another rate hike before October, with a minority predicting that action could be taken at the board meeting on August 27.

Shinyoung Securities Co. fixed income strategist Cho Yong-gu said in a phone call: “This upside surprise is likely to increase the possibility of consecutive rate hikes.”

After the rate hike on July 16, Bank of Korea Governor Shin Hyun Song said that, given inflation remains above target, economic growth is strengthening, and financial stability risks continue to accumulate, policymakers will maintain a hawkish stance. The central bank also stated that it will “substantially” raise its economic growth forecast at its next meeting.

Economists had previously expected that the growth rate in Q2 would slow from the start of the year due to the spillover effects of the Iran war that broke out at the end of February. South Korea is one of the world’s most energy import-dependent economies and is highly sensitive to rising oil prices and import costs, which partially offset the gains brought by the booming semiconductor sector.

After an unusually strong performance in the first quarter, although the overall growth momentum remained unchanged, the market generally expected the Q2 GDP growth rate to slow down. Chip manufacturers are struggling to quickly expand capacity to meet explosive AI-related demand; despite strong orders, output growth is still constrained.

South Korean economist Hyosung Kwon said: “This GDP report will likely put a rate hike on the agenda for the Bank of Korea's August meeting—Governor Shin Hyun Song previously referred to this meeting as ‘an effective meeting’. Our previous expectation was for no policy change, but our baseline forecast now is a 25 basis point hike, though we still see it as a close call.”

Central bank data showed exports grew by 1.4% quarter-on-quarter in Q2, mainly driven by an increase in semiconductor shipments; imports rose by 0.8%, supported by growth in automobiles, machinery, and equipment.

According to the Ministry of Trade, semiconductor shipments increased by about 163% year-on-year in the first half, surpassing the historical annual shipment record set in 2025. Computer exports also surged by 262%.

Officials believe that AI-driven chip demand is increasingly spilling over to the broader economy through channels such as improved corporate profitability, increased investment, and higher wages and tax revenues, thereby cushioning the impact of external headwinds.

This momentum has also supported household consumption. Private consumption grew by 0.4% quarter-on-quarter, compared to 0.6% growth in the previous quarter; government consumption grew by 2.2%. Equipment investment rose 0.2% this quarter after jumping 6.6% in the previous quarter; construction investment fell 0.2% after a 1.4% gain in the previous quarter.

Recent data continues to confirm economic resilience: exports, boosted by robust chip shipments, have pushed the current account surplus year-to-date above last year's record. The strength of the economic recovery is also beginning to show in prices, with inflation in June accelerating to the fastest pace since the end of 2023.

Cho said: “Due to the high base effect, stock price corrections, and rising oil prices, the quarter-on-quarter growth rate in Q3 may be the lowest of the year. Even so, we still plan to revise our full-year growth forecast upward to around 3.3%.”