South Korea GDP expands above estimates in Q2, lifted by semiconductor boom; KOSPI index rallies 3%

South Korea GDP: South Korea's economy expanded more than expected in the second quarter, driven by robust semiconductor exports that offset a slowdown in construction investment, strengthening confidence in the country's technology-led growth story even as markets brace for further interest rate hikes.

Advance estimates released by the Bank of Korea on Thursday showed the economy grew 0.6% quarter-on-quarter on a seasonally adjusted basis during the April-June period, beating the 0.4% growth forecast in a Reuters poll. On an annual basis, GDP expanded 3.7%, ahead of economists' expectations of 3.5%, according to Reuters.

Although growth moderated from the 1.8% expansion recorded in the first quarter, resilient global demand for semiconductors continued to underpin exports and helped cushion weakness in domestic construction activity.

According to Reuters, Bank of Korea officials said the economy could still achieve annual growth of around 3% if quarterly expansion remains above a modest pace in the second half of the year. The central bank had raised its 2026 GDP growth forecast to 2.6% in May and is expected to update its projections in August.

The stronger-than-expected economic performance, coupled with persistent inflation, has reinforced expectations that the Bank of Korea will continue tightening monetary policy. A Reuters poll indicated the central bank is likely to deliver at least one more rate hike this year, taking the benchmark policy rate to 3.00%, followed by another increase to 3.25% in the first quarter of 2027.

Earlier this month, the Bank of Korea unanimously raised its benchmark seven-day repurchase rate by 25 basis points to 2.75%, marking its first increase since January 2023. Policymakers cited the global semiconductor export boom, consumer inflation rising to 3.2% in June and the need to support the weaker won.

South Korean financial markets reacted positively to the GDP data and continued optimism surrounding artificial intelligence spending. The benchmark KOSPI advanced for a third consecutive session, rising 206.54 points, or 3.04%, to 7,004.24 as of 0206 GMT. The index has gained more than 7% over the past three sessions, although it remains 23% below its record closing high reached on June 22.

The Korean won strengthened to 1,467.6 per US dollar, its strongest level since mid-May.

Reuters quoted analysts as saying the balance of risks now favours another rate increase as early as next month if inflationary pressures become more broad-based.

Technology stocks led Thursday's rally after strong earnings from Alphabet and Tesla reinforced expectations that AI infrastructure spending will remain robust, boosting demand for advanced chips and memory products.

Samsung Electronics climbed as much as 4.8%, while SK Hynix gained up to 6.5%. Battery maker LG Energy Solution rose nearly 4%, Hyundai Motor advanced 3.6%, Kia Corp added 1.9%, POSCO Holdings gained 4%, and Samsung BioLogics rose 2.1%.

Asian equities moved higher as investors continued to bet on semiconductor manufacturers benefiting from billions of dollars being invested globally in artificial intelligence infrastructure. MSCI's Asia Pacific equity index rose 0.8%, while the KOSPI, viewed as a bellwether for AI-related investments, gained 2.5%. Samsung Electronics and SK Hynix each rose more than 2%, extending gains in an Asian semiconductor index for a third straight session.

Oil prices also climbed after Iran-backed Houthi militants said they had targeted two Saudi oil tankers in the Red Sea, raising concerns over fresh supply disruptions in the Middle East. Brent crude rose as much as 2.5% to above US$96 a barrel, its highest level since early June.

Geopolitical tensions remained in focus after US President Donald Trump warned that the United States would target Iranian bridges and power plants if Tehran continued attacks on vessels in the Strait of Hormuz, prompting a warning from Iran in response.

Pranati Deva is a seasoned ...