Korea Economics Mid-Year Outlook: Narrowing the K-shaped Recovery Gap

Research evidence excerpt

Korea Economics Mid-Year Outlook: Narrowing the K-shaped Recovery Gap

Asia Pacific InsightM Output gap to turn positive earlier than expected

This improved backdrop likely closes the negative output gap from 2Q26 onwards.

Our revised growth forecasts capture the positive outlook for tech exports and

consumption. We expect sustained resilience in tech exports and positive tracking in the

high frequency data for consumption, including credit card spending and leading indicators

such as consumer sentiment data. This data implies that negative output will turn positive

two quarters earlier than we previously forecast.

However, we also expect an unfavorable base to kick in from 2Q26. The strong print from

1Q26 and elevated oil prices are impacting domestic activities and industrial sectors,

including the production activity of refineries and petrochemical plants, which could turn

the sequential trend to a small contraction. By 2H26, we expect export growth to slow

marginally, given the less favorable base, and stabilize below the accelerated level seen

earlier in the year. The construction sector may contract again after rebounding in 1Q26

given some of the one-off factors (eg, delayed contracts for construction materials going

through) could come under pressure again due to increased prices for raw materials.

That said, despite an overall slowdown in exports and investment activity for the rest of

the year, household consumption and fiscal injection could support the above-2% growth

for the second half. The wealth effect, combined with greater numbers of inbound visitors

appears to be boosting high-end and tourism-related spending, which contributes to

around 15% of total domestic consumption. We see a chance of a second supplementary