AI chip demand ignites exports, South Korea's Q2 GDP exceeds expectations to "add fuel" to interest rate hikes.

The Korean economy recorded higher-than-expected growth in the second quarter, driven by the continued prosperity of chip exports powered by artificial intelligence. This provides support for further interest rate hikes by the central bank. The Bank of Korea announced on Thursday that the Gross Domestic Product (GDP) grew by 0.6% in the three months ending in June, compared to 1.8% growth in the previous quarter. This figure is higher than the market's median forecast of 0.4%. Despite a slight slowdown from the impressive performance in the first quarter (the fastest growth since the end of 2021), the latest data continues the trend of economic data consistently exceeding expectations in recent times, prompting the government, central bank, and International Monetary Fund to raise their growth forecasts for the Korean economy. This strong performance will support policymakers at the central bank to consider another rate hike in the coming months. The Bank of Korea recently raised interest rates for the first time since 2023. A recent survey of economists suggested that the market expects another rate hike before October, with some predicting that action could be taken at the meeting of the board of directors on August 27. Cho Yong-gu, a fixed income strategist at Shinyoung Securities Co., stated over the phone, "This unexpected upward movement likely increases the likelihood of consecutive rate hikes." Following the rate hike on July 16, Bank of Korea Governor Shin Hyun Song stated that policymakers will maintain a hawkish stance due to inflation still being above target, robust economic growth, and ongoing accumulation of financial stability risks. The central bank also announced that it will significantly raise its economic growth forecast at the next month's meeting. Economists had previously anticipated a slowdown in the second quarter due to the spill-over effects of the war in Iran that broke out at the end of February. South Korea is one of the most energy-import-dependent economies in the world, highly sensitive to rising oil prices and increased import costs, partially offsetting the gains from the semiconductor boom. After an exceptionally strong performance in the first quarter, the overall growth momentum remains unchanged, with expectations for a slight slowdown in GDP growth in the second quarter. Semiconductor manufacturers are struggling to rapidly expand capacity to meet the explosive demand for AI-related products, leading to output growth being constrained despite strong orders. Hyosung Kwon, a South Korean economist, stated, "The GDP report is likely to push the Bank of Korea to consider a rate hike at the August meeting - Governor Shin Hyun Song previously referred to this meeting as an 'important meeting.' We had previously anticipated no change, but now our baseline prediction is a 25 basis point rate hike, although we still believe it will be a finely balanced decision." Central bank data revealed that exports grew by 1.4% in the second quarter, primarily driven by an increase in semiconductor shipments; imports grew by 0.8%, propelled by growth in automotive, machinery, and equipment. Data from the South Korean Ministry of Trade showed that chip shipments in the first half of the year surged by approximately 163% year-on-year, exceeding the historical annual shipment record set in 2025. Computer exports also soared by 262%. Officials believe that the demand for AI-driven chips is spilling over into the overall economy through improved corporate profits, expanded investments, increased wages and tax revenues, thereby buffering the impact of external headwinds. This momentum also supported household consumption. Private consumption grew by 0.4% month-on-month, down from 0.6% growth in the previous quarter; government consumption increased by 2.2%. Equipment investment, which had jumped by 6.6% in the previous quarter, only saw a slight increase of 0.2% this quarter; construction investment, on the other hand, fell by 0.2% after growing by 1.4% in the previous quarter. Recent data continues to confirm the economy's resilience: exports are boosted by strong chip shipments and the current account surplus from the beginning of the year has already surpassed the record set for the entire previous year. The strength of the economic recovery is also beginning to price levels, with inflation accelerating to its fastest pace since the end of 2023 in June. Cho stated, "Due to high base effects, stock price corrections, and rising oil prices, the quarter-on-quarter growth rate in the third quarter may be the lowest point of the year. Nevertheless, we still plan to raise our annual growth forecast to around 3.3%."