We expect domestic demand to improve more meaningfully after the snap election on 3 June. The largest risk factor has been removed following the formal departure of former President Yoon Seok Yeol, and we have observed a gradual recovery in sentiment compared to the previous quarter. Recent surges in capital goods imports suggest that equipment investment is likely to rise meaningfully, while government spending is also expected to accelerate.
In addition, counter-cyclical measures in monetary and fiscal policy will bolster the economy. The Bank of Korea (BoK) is still in an easing cycle. Also, high volatility in the foreign exchange market has subsided, and inflation hovering around 2% enables the BoK to focus on supporting growth. We expect the central bank to lower its policy rate from the current 2.75% to 2.0% by the end of this year.
Regarding fiscal policy, the long-awaited supplementary budget was passed in early May, and an expansionary fiscal stance for 2026 is anticipated, regardless of the outcome of the election. If the Democratic Party candidate, who is currently leading by a sizable margin in the polls, were to win the presidential election, it would result in another supplementary budget worth 1.5% of GDP.
Lastly, South Korea is likely to benefit from the recent ceasefire in the US-China trade war, given that these are two of its largest export partners. Although we still anticipate that exports will hinder growth for the remainder of the year, the expected downturn is now thought to be less severe following the recent 90-day pause.