AI chips prop up South Korea’s economy: Q2 GDP grows 3.7% beating expectations, but domestic demand remains weak

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The ongoing boom in artificial intelligence investment continues to drive up semiconductor demand, becoming the most important growth pillar of the Korean economy. Second quarter GDP once again exceeded expectations, showing that the export engine centered on memory chips is still providing support for this export-oriented economy.

Preliminary data released by the Bank of Korea on Thursday showed that GDP grew 3.7% year-on-year in the second quarter, higher than the market expectation of 3.5%; quarter-on-quarter growth was 0.6%, also exceeding the expected 0.4%. Exports were the main driving force, with overseas demand for semiconductors, machinery, and equipment remaining strong.

After the data release, the market responded positively. The Korean won strengthened against the US dollar, with the USD/KRW down about 0.58%; Korea’s KOSPI index rose about 1.82%. Investor confidence in exports and corporate earnings prospects increased, and memory chip giants like Samsung Electronics and SK Hynix continued to benefit from the global AI infrastructure investment boom.

However, growth in the second quarter slowed compared to the first, and consumption and construction investment are still weak. After the Bank of Korea started a rate hike cycle in July, whether chip exports can continue to offset the impact of weak domestic demand and rising financing costs will be key in determining the economy’s future performance.

Export Growth Driven by Semiconductors and Equipment

Bank of Korea data shows exports increased 1.4% quarter-on-quarter in the second quarter, with semiconductors, machinery, and equipment as the main contributors. Accelerated global AI infrastructure construction is driving demand for high-performance memory chips, and Korea’s advantage in these industries is directly translating into export growth.

Memory chip suppliers like Samsung Electronics and SK Hynix are the main beneficiaries in this wave of demand expansion. For Korea, chip exports are not just an indicator of the industry’s prosperity, but an important variable influencing overall economic growth, corporate investment, and foreign exchange market performance.

Exports maintained positive growth in the second quarter, indicating that AI-related capital expenditure continues to drive Korea’s real economy. Although export growth has slowed from previous highs, demand for semiconductors and equipment still provides stable external support for the economy.

Earlier, Goldman Sachs pointed out in a May research report that Korea’s AI-related exports may approach 30% of GDP in 2026, with the current account surplus exceeding 10% of GDP. The Korean government has recently raised its full-year growth forecast from 2% to 3%.

GDP Exceeds Expectations, but Growth Momentum Has Slowed

Year-on-year, Korea’s GDP grew 3.7% in the second quarter, slightly below the first quarter’s 3.8%; quarter-on-quarter, 0.6% growth was also below the first quarter’s 1.8%. This means Korea’s economy continues to expand, but growth has slowed compared to the beginning of the year.

The main pressure on growth comes from domestic demand. Private consumption grew only 0.4% quarter-on-quarter in the second quarter, while construction investment fell 0.2% quarter-on-quarter. Weak consumer willingness and a cooling real estate market continue to limit domestic demand’s contribution to the economy.

The divergence between strong exports and weak domestic demand remains evident. The boom in the semiconductor industry has improved foreign trade and the corporate sector, but consumption and construction investment have not improved in tandem, keeping the economy’s reliance on external demand relatively high.

The Bank of Korea warned after the first quarter’s GDP release of a “K-shaped” economic structure — the prosperity of the tech industry leads to disproportionate benefits for high-income groups, and stripping out the IT sector would reduce annual economic growth by 0.4 percentage points. The weakness in consumption and investment in the second quarter continues this structural feature, meaning the “trickle-down effect” of the chip boom on the overall economy remains to be verified.

Policy Game: Rate Hikes Supported by Data, But Divergence Intensifies Dilemma

For the Bank of Korea, the second quarter’s GDP exceeding expectations provided post-hoc support for the July rate hike decision. With inflation still above target and the chip boom’s spillover effects extending into wages and consumption, the data foundation for maintaining a tightening stance has become more solid.

But the weakness in both private consumption and construction investment also means the central bank must find a more precise balance in subsequent rate hike cycles between “curbing inflation” and “avoiding excessive suppression of domestic demand.” Governor Rhee Chang-yong has clearly warned that spillover effects from the chip boom may cause inflation to be more persistent outside the tech sector. June CPI was still as high as 3.2%, the US-South Korea interest spread is around 200 basis points, and the structural pressure on the won is unlikely to fundamentally ease in the short term.

For investors, the core signal from second quarter GDP data is: Korea’s growth narrative is still led by AI semiconductor exports, but tightening macro policy and weak domestic demand are forming new boundaries of constraint — this combination of “high growth, tight monetary policy, weak domestic demand” will test the resilience of Korea’s economy and the finesse of its policy.

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