Chips power firmer South Korea Q3 growth

South Korea’s economy is expected to have grown 0.7% on a seasonally adjusted quarter-on-quarter basis in the July-September period, a slight acceleration from 0.6% in April-June, based on the median forecast of 16 economists polled from October 14-23. On a year-on-year basis, gross domestic product is forecast to expand 3.0% in the third quarter, easing from 3.7% in the previous quarter. Forecasts for quarterly growth range from 0.5% to 1.6%, reflecting differing views on the strength of the recovery.

The pick-up in growth is being driven by a strong rebound in external demand, especially in semiconductors, even as domestic demand remains uneven. An AI-fuelled chip boom has supported South Korea’s economy for years and is currently helping offset pressure from high borrowing costs and elevated household debt on household consumption.

Exports rose 84% from a year earlier in September to a record $120.9 billion. This jump was led by a 262.8% surge in semiconductor exports to $60.3 billion, with chips accounting for nearly half of total shipments. The scale of the increase underlines the semiconductor industry’s outsized role in driving overall economic growth.

AI-related investment and demand are central to the current export boom. Economists note that the Korean economy is now very vulnerable to conditions in the semiconductor industry, as growth is being driven mainly by this sector. The contrast between fast-growing chip exports and softer demand in other areas has raised concerns that the recovery, which began in the first quarter, is becoming increasingly uneven.

The Bank of Korea kept its benchmark interest rate at 3.00% on Thursday, in line with consensus expectations. At the same time, it raised its growth forecast to 3.3% for this year and 2.9% for next year, indicating confidence that export strength and AI-related investment will continue to support activity.

A separate poll projects South Korea’s growth at 3.5% in 2026, suggesting an expectation of sustained expansion over the medium term. However, some economists highlight that financial conditions are becoming less accommodative and that high household debt remains a headwind, limiting the transmission of export gains into broader domestic demand.

Economists point to structural challenges in the labour market, describing it as being in a downturn. With companies adopting AI more rapidly, younger workers in particular are finding it very hard to secure jobs, which could constrain household incomes and consumption.

The increasing concentration of growth in AI-related chip exports is seen as a source of risk. Some economists argue that the concentration risk of growth being driven by AI should concern the central bank, noting that the Korean economy is very vulnerable when so much activity is tied to the semiconductor industry. These factors underscore the importance of policy measures, including fiscal tools, to help transmit export gains more broadly through the domestic economy.