Amid a very uncertain global environment, Korea’s economy has demonstrated a strong capacity to adapt to shifting conditions.

Korea’s economy entered 2025 under a cloud of uncertainty. The declaration of martial law in December 2024 and the resulting political gridlock weighed heavily on confidence, dragging GDP growth to just 0.3 percent year-on-year in the first half of 2025. However, by the second half, the economy began to regain its footing. Political stabilization after the June presidential election, targeted fiscal stimulus, and robust semiconductor exports helped the economy rebound.

AMRO’s 2025 Annual Consultation Report on Korea provides a comprehensive assessment of these developments and outlook, the key risks on the horizon, and the policy choices that will help maintain growth momentum while preserving macroeconomic stability.

Consumption and exports drive recovery

The second half of 2025 saw a clear improvement in economic activity. Private consumption rebounded as political uncertainty receded and fiscal stimulus measures—particularly universal cash transfers—supported household spending. At the same time, exports continued to provide a crucial engine of growth, particularly in semiconductors.

Construction investment, however, continued to contract amid ongoing distress in real estate project financing.

Looking ahead, the recovery is expected to strengthen further as consumer sentiment improves, semiconductor exports remain resilient, and construction investment begins to stabilize. AMRO projects Korea’s economy to grow by 1.9 percent in 2026, gradually narrowing the negative output gap.

Inflation, meanwhile, has remained well contained. In 2025, consumer prices averaged around 2.1 percent, close to the Bank of Korea’s target. Stabilizing food prices and subdued global energy costs helped anchor inflation expectations, and price pressures are projected to remain stable at around 1.9 percent in 2026.

Semiconductors remain Korea’s strategic advantage

One of the most striking features of Korea’s recovery is the continued strength of its semiconductor industry. Deeply integrated in global manufacturing networks, Korea has benefited from the rapid expansion of artificial intelligence infrastructure, which has boosted demand for high-level chips such as high-bandwidth memory used in data centers. These developments have helped stabilize Korea’s trade performance even as other sectors experience slower growth.

Yet, this reliance also underscores Korea’s exposure to geopolitical and trade tensions. Potential shifts in US tariffs on semiconductors and slower growth in major trading partners could affect export prospects. At the same time, non-semiconductor sectors—including automobiles and steel—remain vulnerable to protectionist measures.

Domestic vulnerabilities persist

Despite the improving macroeconomic conditions, several domestic vulnerabilities remain.

One area of concern is the housing market. Property prices in parts of the capital region have risen rapidly. While higher prices may partly reflect strong demand and structural supply constraints, sharp corrections could pose risks to financial stability, particularly if leveraged households or financial institutions are exposed to sudden declines.

Weaknesses in the construction sector also remain a challenge. Distress in real estate project financing has slowed building activity and continues to dampen investment dynamics. Although restructuring efforts have mitigated risks within financial institutions, their exposure to the real estate sector remains significant and warrants continued vigilance.

At the same time, Korea faces longer-term structural challenges, including demographic aging and a shrinking labor force. Addressing these issues will be essential for sustaining productivity and growth over the coming decades.

Policy in a complex environment

For policymakers, the current environment calls for careful calibration.

Amid lingering concerns over household debt and exchange rate volatility, monetary policy has remained cautious, with the Bank of Korea maintaining a steady stance while assessing risks to both growth and financial stability. With inflation close to target, the central bank has some room for maneuver, but concerns about housing market dynamics and exchange rate volatility may limit the scope for aggressive easing.

While Korea retains moderate fiscal space, the authorities should swiftly deploy well-targeted fiscal measures if adverse shocks to growth emerge. Over the medium term, maintaining fiscal credibility remains essential. Temporary stimulus measures should eventually be withdrawn as conditions normalize.

More broadly, establishing credible fiscal anchors and advancing structural fiscal reforms will help ensure long-term sustainability.

Building resilience for the future

Looking beyond the immediate recovery, Korea’s long-term growth prospects will depend on its ability to adapt to structural and geopolitical shifts.

Maintaining technological leadership in strategic industries such as semiconductors, automobiles, and shipbuilding, will be critical for sustaining export competitiveness. This will require sustained investment in research and development, human capital, and supply chain resilience, particularly as technological rivalry intensifies in an increasingly contested global landscape.

At the same time, addressing structural challenges, such as demographic aging, housing market imbalances, and labor market constraints, will be essential in ensuring sustainable and inclusive growth.

With prudent policy management and continued structural reforms, the country is well positioned to navigate near-term risks while laying the foundations for sustainable growth in the years ahead.