Growth has moderated from its peak but remains strong. According to the preliminary estimate, GDP growth slowed to 12.9% yoy in 2Q, from the 1Q peak of 14.5%. On a QoQ saar basis, growth remained solid at 9.9%, compared with 6.9% in 1Q.
The K-shaped divergence between exports and domestic demand narrowed. Exports of goods and services moderated to 21.6% yoy in 2Q from 35.8% in 1Q. Meanwhile, gross capital formation accelerated to 15.1% from 5.9%, while private consumption improved to 5.9% from 4.7%. As a result, net exports contributed 5.8ppt to headline GDP growth, while domestic demand contributed 7.1ppt. This marked the first time in five quarters that domestic demand made a larger contribution than net exports.
We see some upside risks to our 2026 and 2027 GDP growth forecasts of 9.4% and 4.5%, respectively, although we are maintaining them for now. We continue to expect AI-driven super growth to transition toward a more normalized pace from 2H26 through 2027. This outlook reflects uncertainty over AI investment returns, rising external financing pressures facing US hyperscalers, as well as physical constraints, regulatory uncertainty, and intensifying competition from Chinese players. We expect the K-shaped recovery pattern to continue improving through 2H26-2027. Domestic demand should be supported by cumulative wealth effects from the stock market, stabilization in the property market, and resilient labor market conditions.
The GDP data, both in terms of growth momentum and composition, should provide sufficient confidence for the central bank to hike rates in 2H26. CPI inflation is expected to remain in the 2-2.5% yoy range through 2H26, driven by a rebound in oil prices amid renewed Middle East tensions and volatile food prices under El Niño conditions. We continue to expect a 12.5bp rate hike in 4Q, bringing the policy discount rate to 2.125%.
In financial markets, pressures from the stock market correction, capital outflows, and tighter liquidity conditions remain. The TAIEX has declined 10% from its late-June peak, driven by the global semiconductor stock sell-off and, in particular, heightened volatility in the KOSPI. Foreign net selling of the TAIEX reached USD23bn in July. This was accompanied by currency depreciation, rising money market rates, and higher government bond yields. The market correction was not unexpected, given stretched equity valuations, increased retail investor participation, and elevated leverage. Seasonal dividend payments during July-August have also amplified outflow pressures and their impact on the currency and interest rates.
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