Why South Korea Is Staging A K-Shaped Economic Recovery

(MENAFN- ING) December exports accelerated thanks to strong demand for Korean IT products

South Korean exports rose a greater-than-expected 13.4% year-on-year in December (vs 8.4% in November, 8.5% market consensus). Of the 15 main export products, six increased. IT exports were particularly strong. Semiconductors rose the most -- by 43.2% -- thanks to robust demand for AI data centres and strong pricing. Other IT products, such as mobile devices (24.7%), computers (36.7%), and displays (0.8%), all increased. Yet autos, petrochemicals, steel, home appliances, and batteries declined. Automotive exports declined by 1.5% due to increased overseas production and temporary product cuts during line maintenance. Steel and petrochemicals continued to decline due to global oversupply and soft prices. Though not major export categories, newly emerging sectors -- primarily K-culture-related products such as food, bio-health, and cosmetics -- posted steady increases.

We expect IT- and K-culture-related products to remain the key drivers of exports in 2026. Despite recent concerns about AI overvaluation, global tech capex is expected to increase. Export items facing global oversupply are expected to undergo industry consolidation and are unlikely to rebound anytime soon.

Meanwhile, imports rose 4.6% YoY in December. Energy imports declined by 6.8% while non-energy imports rose firmly by 7.3%. We believe that increased capital goods imports will boost equipment investment in the current quarter. The trade surplus widened to $12.2 billion in December, likely boosting fourth-quarter 2025 GDP growth.

Tech exports will lead the overall recovery in exports While sentiment indicators remain favourable, some risks are taking shape

The consumer confidence index slipped to 109.9 from 112.4, but remained above the long-term average. We believe recent KRW depreciation and a sudden stock market correction dampened sentiment. Inflation expectations remain steady at 2.6% for the third consecutive month, indicating no immediate concerns. Yet if the KRW remains around 1,450, both sentiment and activity will likely be affected.

Meanwhile, expectations on housing prices rebounded again. This should concern policymakers. Although strict macroprudential regulations are in place, housing demand in Seoul remains strong, resulting in a K-shaped housing market.

Recent business surveys similarly point to a K-shaped recovery, with manufacturing improving and non-manufacturing deteriorating. The manufacturing purchasing managers' index rose to 50.1, while the business survey index (BSI) outlook also advanced to 95.3 from 93.9 in November. Korean manufacturers are mostly export-oriented. As such, a de-escalation of trade tensions and weaker KRW may work in favour of sentiment. However, the domestically oriented non-manufacturing outlook declined substantially to 87.8 from 91.7. This likely reflects a slowdown in domestic demand as the impact of fiscal stimulus dissipates.

FX and housing are expected to be primary factors affecting policy decisions

Throughout December, the FX authorities implemented nearly fifteen measures aimed at stabilizing the Korean won. The USDKRW is significantly lower following verbal intervention and smoothing operations in the last week of the year. We don't think it has altered the underlying trend of the KRW weakness. While the upside remains limited by intervention concerns, strong USD funding needs should keep USDKRW above 1,425.

FX relief measures announced in December

Recent measures to cool Seoul's property market include tightening loan limits, designating the city a speculative zone with residency conditions, and accelerating urban renewal to increase supply. Since the steps taken on 15 October, housing transactions have declined overall, except in high-activity areas like Gangnam and southern Seoul. We believe stricter rules may temporarily slow down activity, but upward price pressures persist. Although some favour higher property taxes to curb demand, such measures are unlikely to be implemented before June's local government elections. Instead, the government might relax redevelopment rules and lower transaction taxes.

Seoul housing prices are still on the rise Weak KRW added inflationary pressures

Korea's consumer price inflation eased slightly to 2.3% YoY in December (vs 2.4% in November, 2.3% market consensus). Weak fresh food prices lowered overall inflation, but petrol prices rose meaningfully, mainly due to higher import costs.

Going forward, we expect CPI to drop below 2% in the first half of 2026 mainly due to a high base last year. Still, the Bank of Korea is likely to keep policy rates unchanged at 2.5% in 2026 amid expectations of rising property prices in the Seoul area and the continued weakness of the KRW. Instead, the BoK will seek to expand the role of the Bank Intermediated Lending Support Facility as its favoured monetary policy instrument.

Inflation stayed above 2% in December, but expected to drop below 2% in 1H26

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