Economists Raise South Korea's 2026 Growth Forecast to 2.2%

The Institute of International Finance (IIF) has raised its 2026 growth forecast for South Korea to 2.2%, surpassing consensus estimates of 2% and the Bank of Korea’s (BoK) projection of 1.8%.

In a December 22 report, Deputy Chief Economist Ashok Bhundia highlighted a robust recovery driven by improving consumer and business sentiment since mid-2025, following President Lee Jae Myung’s election in June. The resolution of political uncertainty has enabled better policy coordination between the executive and legislature.

South Korea’s growth

Private consumption contributed significantly to third-quarter GDP growth, bolstered by the BoK’s cumulative 100 basis point rate cuts since October 2024. Services spending, particularly healthcare amid an aging population, remains strong, while goods consumption is gradually recovering despite high household debt.

Exports, especially semiconductors, have exceeded expectations, supported by a new US-Korea trade deal capping tariffs at 15% on Korean goods and committing US$350 billion in investments. This has helped Korean exports to the US outperform those to other regions.

The IIF expects the BoK to maintain its policy rate at 2.5% throughout 2026, prioritising financial stability over further cuts, unless a global hard landing materialises. Inflation is seen staying near the 2% target, allowing the central bank to overlook temporary food price shocks.

Despite large current account surpluses, the won faces depreciation pressure from portfolio outflows. The BoK is managing this by allowing its forward book to roll off but stands ready for spot interventions if needed.

Overall, the upgraded outlook reflects domestic demand resilience and export strength offsetting external risks.

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