Hyundai Research Institute raises South Korea's 2026 growth forecast to 3.5%

The Hyundai Research Institute has raised its growth forecast for the South Korean economy this year to 3.5 percent from 2.7 percent, citing strong semiconductor exports driven by rising global AI investment, a recovery in facility investment and expanded government fiscal spending.

The institute released the revised outlook Sunday in a report titled "Tasks Left by 3-Percent Growth: The Need for Qualitative Growth Through Structural Reform."

The institute said the domestic economy has entered an expansionary phase as semiconductor-led exports have performed well on the back of growing global AI investment, with the recovery in facility investment and increased government spending adding further momentum.

The expansion is expected to continue next year, though the growth rate is forecast to ease to 2.4 percent. Semiconductor exports and government spending of 820.9 trillion won ($613 billion) will support growth, but at a slower pace than this year.

The institute also warned that growth could weaken if global semiconductor demand slows or if geopolitical risks — including the Middle East war and US-China tensions — intensify again.

Private consumption growth is forecast to slip from 2.4 percent this year to 2.0 percent next year. The institute said a base effect from this year's consumption gains, household debt burdens and rising interest rates could all weigh on the recovery in spending.

Growth in facility investment is expected to moderate from 5.3 percent this year to 3.7 percent next year. While investment in semiconductors and IT will continue, tighter financing conditions stemming from higher interest rates are seen as a headwind.

Export growth is projected to fall sharply, from 50.8 percent this year to 2.9 percent next year. The institute said IT exports, led by semiconductors, will remain solid through the first half of next year, but growth will slow due to base effects and could turn negative in the second half.

Given South Korea's heavy reliance on semiconductor exports, the institute said shifts in global AI investment and the semiconductor cycle will be the key variables shaping the direction of the economy next year.

The institute said structural reforms to improve the quality of growth will be needed after the current period of 3-percent-range expansion. It recommended stimulating domestic demand alongside efforts to expand growth potential, scaling up investment in AI and advanced industries, and diversifying export markets and product lines to reduce dependence on specific countries and sectors.

"Monetary policy should maintain price stability and financial stability as its core principles, while adopting a flexible approach that takes into account overall growth trends and domestic and external economic conditions," the institute said.