South Korea’s economy posts rebound amid tariff, property risks
The central bank has projected a minimal inflationary impact from the stimulus and urged swift implementation
[SEOUL] South Korea’s economy returned to growth last quarter after a modest contraction in the previous period, signalling resilience even as trade tensions simmer and domestic financial risks deepen.
Gross domestic product expanded by 0.6 per cent in the three months to June from the previous quarter, the Bank of Korea (BOK) said on Thursday (Jul 24). The result was a tad higher than the median estimate of 0.5 per cent growth. The economy grew 0.5 per cent from a year earlier.
The pickup was driven by solid exports and improved domestic demand ahead of the government’s supplementary budget, even though those funds only began filtering into the economy from July. Sentiment got a boost after a prolonged period of political turmoil following Yoon Suk-yeol’s impeachment was largely put to rest with Lee Jae Myung’s election as president in early June.
Retail sales and department store sales advanced in May, and consumer sentiment surged in June before further gains in July took the index to the highest level in four years.
Thursday’s data will come as modestly good news for Lee at a time when his administration continues to lobby for relief from US tariffs. Finance Minister Koo Yoon-cheol and Trade Minister Yeo Han-koo will meet their US counterparts, Treasury Secretary Scott Bessent and Trade Representative Jamieson Greer, in Washington on Friday.
The outcome of the negotiations carries high stakes for South Korea, where exports were equivalent to more than 40 per cent of GDP last year.
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For that reason, the central bank will likely continue to weigh the potential negative hit from US duties against signs of an overheating property market at home. Governor Rhee Chang Yong held rates steady in July after having made four cuts since October, citing concerns related to Seoul’s property market and household debt among factors behind the decision.
Thursday’s modest growth figure will support the case for authorities to underscore that the easing cycle remains intact even if they hold settings steady when they next set policy on Aug 28.
“In the middle of July, high frequency data for Seoul apartment prices, transactions and household loans suggest a gradual slowdown from a cyclical peak in June thanks to prudential macro measures,” said Citi Research analyst Jin-Wook Kim. “Still, they suggest the stabilisation of the Seoul housing market rally is less likely to happen in a month.”
The BOK is likely to stick to a wait-and-see approach until its October board meeting, as it assesses whether Seoul housing prices are truly stabilising, how fiscal stimulus measures take effect, and what broader impact US tariffs might have, Kim added.
The Lee administration unveiled a 31.8 trillion-won (S$29.5 billion) extra budget in June to aid households, spur spending, and offset revenue shortfalls. Although the package was swiftly approved, disbursements began in July, meaning most of its economic impact will likely materialise in the second half of the year.
Governor Rhee said each of this year’s two extra budgets would lift GDP by 0.1 percentage point. The first was already factored into the BOK’s May forecast, while the second should help buffer downside risks in the coming quarters.
The central bank has projected a minimal inflationary impact from the stimulus and urged swift implementation. It also noted the extra spending would not constrain its ability to cut rates further if needed to support the economy.
In May, the BOK nearly halved its 2025 growth forecast to 0.8 per cent from 1.5 per cent, citing US trade tensions and sluggish domestic demand. Rhee said a sharp downturn in construction investment alone was shaving 0.9 percentage point off growth, with the slump proving deeper than previously anticipated.
Exports have remained a key support, despite mounting protectionist threats from Washington. Semiconductor shipments jumped more than 11 per cent in the first half from a year earlier, buoyed by global demand for artificial intelligence-related technologies, raising hopes the rally may extend into 2026.
Much of South Korea’s economic momentum now hinges on the outcome of trade negotiations with Washington. Agricultural and energy concessions, along with increased contributions towards military costs, are on the table as potential bargaining chips in those talks.
Meantime, financial imbalances remain a major concern. While gains have been moderating, apartment prices in Seoul have climbed for 24 straight weeks. Authorities have stepped in with a new cap on the maximum amount of mortgage loans for home purchases in the greater Seoul area, though the effects remain to be seen.
Rhee warned that more than 70 per cent of household loans held by Korean banks are backed by real estate, posing systemic risks. He also noted that household credit has never declined over the past two decades due to weak macroprudential coordination with monetary policy. BLOOMBERG
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