After contracting by 0.2% in the final three months of 2025, South Korean economic activity was particularly dynamic in the first quarter of this year, with growth of 1.7%, well above expectations.
This was the strongest expansion since the third quarter of 2020, during the post-Covid recovery. It was driven by a sharp 5.1% increase in exports, supported by the AI boom and the resulting strong demand for semiconductors, which South Korea produces on a large scale. Economic activity was also supported by robust investment.
More difficult months ahead
The excellent economic performance recorded in the first quarter is unlikely to be repeated in the coming months, as the war in the Middle East now weakens South Korea's economy.
As the world's fourth-largest oil importer, South Korea is highly exposed to disruptions in the Strait of Hormuz. Despite the government capping fuel prices for the first time in nearly three decades, the conflict has pushed inflation to 2.2% in March, above the central bank's 2% target.
Oil crisis may force increase in key rates
The rise in prices will intensify in the coming months if oil prices remain at their current elevated levels. This would force monetary authorities to raise their key interest rate, weighing on domestic demand and economic activity.
If export momentum is maintained, however, the South Korean economy should remain on a favourable path and record GDP growth of around 2% for 2026 as a whole.
Limited upside potential
At a historical high, the Seoul stock market offers too little upside potential to justify investing.
This is especially the case given the market's particularly high volatility in recent years. Do not buy South Korean equities. For more balanced investment options, see our asset allocation strategy: