South Korea: Caught in the crosswinds – Standard Chartered

Korea’s 2026 macro outlook is likely to be driven more by domestic demand than in 2025. However, external financial conditions could pose a barrier to domestic performance. Financial stability concerns are likely to limit monetary and fiscal policy flexibility. The government’s role in risk management will be important to contain chronic financial issues, Standard Chartered's economist Chong Hoon Park reports.

A more balanced growth profile

"Korea’s 2026 economic outlook points to a more balanced growth profile compared to 2025, when activity was largely driven by exports and the global semiconductor cycle. We expect domestic demand to contribute more meaningfully to growth, alongside continued export performance, reflecting a likely cyclical recovery in consumption and construction investment. Exports – particularly AI-related outbound investment and semiconductor shipments – will remain an important stabiliser, but no longer the dominant growth engine, in our view."

"We forecast c.2.0% GDP growth in 2026, improving from our estimated 1.0% in 2025. Private consumption should recover gradually, supported by wealth effects from a firmer equity market and easing negative base effects on real incomes. Construction investment is likely to rebound following a prolonged contraction, reflecting the fading of unusually strong negative base effects rather than a renewed structural upswing. As such, we expect the recovery to remain cyclical rather than structural. Exports should continue to support growth, but their incremental contribution may moderate given strong base effects from 2025. This should allow domestic demand to play a larger role in the growth mix, likely resulting in more balanced expansion than in recent years."

"However, this outlook might unfold within a demanding global financial environment, defined by three forces: persistent US inflation, ongoing global fiscal expansion, and continued competition for global USD liquidity. While we do not think these factors will overturn Korea’s balanced-growth narrative, they could shape the financial conditions under which the economic recovery proceeds, and constrain policy flexibility."