South Korea’s Economy Rebounds, But Faces Risks from Tariffs and Real Estate
South Korea’s economy returned to growth in the second quarter, underscoring its resilience amid global trade tensions and domestic financial vulnerabilities.
According to the Bank of Korea (BOK), gross domestic product (GDP) grew by 0.6% in the quarter ending June, slightly surpassing economists’ expectations of 0.5%. Compared to the same period last year, the economy expanded by 0.5%.
The recovery was supported by strong export performance and rising domestic consumption, ahead of the implementation of a supplementary budget package in July. A boost in consumer sentiment also followed the political stabilization brought by Lee Jae Myung’s election as president in early June, which ended the uncertainty surrounding Yoon Suk-yeol’s impeachment.
Retail and department store sales rose in May, and consumer confidence reached a four-year high by July.
This rebound provides a lift for President Lee as his administration prepares to negotiate with U.S. officials for tariff relief. Finance Minister Koo Yoon-cheol and Trade Minister Yeo Han-koo are set to meet with U.S. Treasury Secretary Scott Bessent and Trade Representative Jamieson Greer in Washington on Friday. With exports making up over 40% of South Korea’s GDP, the stakes are high.
At the same time, the BOK faces a delicate balancing act—managing external trade risks while addressing concerns over an overheating property market. In July, the central bank kept interest rates unchanged after four cuts since October, citing real estate imbalances and rising household debt.
Analysts suggest the bank will likely hold off on further policy changes until its October meeting as it monitors housing prices, fiscal stimulus effects, and the broader impact of U.S. tariffs. “Early data from mid-July shows signs of a slowdown in Seoul’s housing market, though it’s too soon to say whether the rally has ended,” noted Citi Research analyst Jin-Wook Kim.
The government approved a 31.8 trillion-won (S$29.5 billion) extra budget in June to boost household spending and make up for revenue shortfalls, though its economic impact is expected to be felt primarily in the second half of the year. Governor Rhee Chang Yong estimates each of this year’s two supplementary budgets will add about 0.1 percentage point to GDP.
Despite concerns, the BOK expects limited inflation from the additional spending and has affirmed its readiness to cut rates again if needed.
Still, challenges remain. In May, the central bank slashed its 2025 growth forecast from 1.5% to 0.8%, citing trade tensions and sluggish domestic demand. A steep drop in construction investment has alone cut nearly a full percentage point from GDP growth.
Exports remain a bright spot, driven by global demand for AI-related technologies. Semiconductor exports rose over 11% in the first half of the year, raising optimism for continued momentum into 2026.
However, financial stability risks persist. Seoul apartment prices have risen for 24 consecutive weeks, prompting authorities to impose stricter mortgage caps. Still, the effectiveness of these measures is uncertain.
Governor Rhee has warned of systemic risks, with over 70% of household loans tied to real estate. He also noted that Korea has not seen a decline in household credit in over 20 years due to inadequate coordination between macroprudential tools and monetary policy.
