South Korea’s economy maintained solid growth momentum in the second quarter of this year, supported by a simultaneous recovery in exports and domestic demand. Notably, nominal GDP surged 26.4% year-on-year — the fastest pace since Q3 1979 (27.7%), marking a roughly 47-year high.

According to the Bank of Korea’s “Q2 2026 National Income (Preliminary)” report released on the 8th, real GDP grew 0.6% quarter-on-quarter, matching the advance estimate published in July. On a year-on-year basis, GDP expanded 3.7%, sustaining growth in the upper-3% range following Q1’s 3.8%.

Quarterly growth rebounded from -0.1% in Q4 last year to 1.8% in Q1 this year, then held steady in the mid-0% range in Q2. In detail, growth rates for construction investment and intellectual property investment were each revised up by 0.1 percentage point, while government consumption was revised down by 0.1 percentage point.

Exports and consumption were the primary growth drivers. Q2 exports rose 1.3% quarter-on-quarter, led by semiconductors and machinery & equipment. Imports also increased 0.7%, driven by automobiles and machinery & equipment, but export growth outpaced import growth. As a result, net exports contributed 0.3 percentage points to growth.

Recovery signals in domestic demand were also evident. Private consumption rose 0.4%, with goods consumption (including home appliances) and services consumption (including food and accommodation) both increasing. Private consumption contributed 0.2 percentage points to growth. Intellectual property investment — which includes R&D and software — grew 3.4%, adding 0.2 percentage points to the growth rate. Combined with private consumption, domestic demand contributed 0.3 percentage points to overall growth.

Facilities investment increased 0.2%. While transportation equipment investment fell 7.7%, machinery investment (including semiconductor manufacturing equipment) rose 2.3%, keeping the overall figure positive. Construction investment declined 0.1% due to weak civil engineering activity, while government consumption edged up 0.1%, driven primarily by health insurance benefit expenditures.

By industry, manufacturing and services continued to expand. Manufacturing output rose 1.4%, led by computers, electronics, and optical equipment. ICT manufacturing and non-ICT manufacturing grew 1.5% and 1.4%, respectively. The services sector also grew 1.0%, with wholesale & retail and accommodation & food services up 0.5% and transportation up 2.1%. In contrast, construction declined 1.9% as civil engineering weakness offset gains in building construction. Agriculture, forestry, and fishing plunged 7.2% due to sluggish crop, livestock, and fishery output.

Unusual Surge in Nominal Indicators

The most striking aspect of this release was the sharp rise in nominal indicators. Q2 nominal GDP increased 9.2% quarter-on-quarter and 26.4% year-on-year — the highest growth rate in approximately 47 years, since Q3 1979’s 27.7%.

The GDP deflator, which comprehensively measures price levels, rose 21.9% year-on-year, the highest in 45 years. Unlike the consumer price index, the GDP deflator reflects price changes across all domestically produced goods and services, including export prices.

This deflator surge was driven more by rising export prices than by domestic inflation. While the domestic demand deflator rose only 3.6%, the export deflator surged 56.6% and the import deflator climbed 21.0%. Export prices rose far faster than import prices, improving South Korea’s terms of trade.

The wide gap between nominal GDP and real GDP (up 3.7% year-on-year) reflects the same dynamic. This nominal growth rate was driven largely by price increases rather than actual production gains. In Q1, nominal GDP growth of 17.1% also far exceeded real GDP growth of 3.8%, which the Bank of Korea attributed at the time to rising export prices — particularly semiconductors — rather than domestic inflation.

Gross operating surplus, which reflects corporate earnings, surged 18.5% quarter-on-quarter and 48.2% year-on-year in Q2 — the highest since GDP statistics began being published in 2010. The sharp increase in manufacturing operating profits, led by semiconductors, was the primary driver. Rising gross operating surplus translates into higher household income through performance bonuses and dividends, while also boosting government revenue through corporate and dividend taxes.

Improved Real Purchasing Power and Surging Savings Rate

Real Gross National Income (GNI), which measures the nation’s real purchasing power, rose 3.1% quarter-on-quarter — far exceeding real GDP growth of 0.6%. On a year-on-year basis, real GNI jumped 15.6%, the fastest since Q4 1988 (15.7%).

This was driven by a substantial increase in real trade gains resulting from improved terms of trade. Real trade gains expanded from 38.7 trillion won (approximately $28.8 billion) in Q1 to 58.5 trillion won (approximately $43.6 billion) in Q2, underpinning the rise in real GNI. This means that rising export prices for semiconductors and other goods have enabled South Korea to secure greater purchasing power abroad for the same volume of exports. While domestic production volume itself grew only modestly, the improvement in terms of trade meant that the real purchasing power felt by South Koreans grew faster than GDP.

Nominal GNI rose 8.8% quarter-on-quarter and 26.4% year-on-year. The surge in nominal indicators has raised prospects for South Korea achieving per-capita GNI of $40,000 this year. At the start of the year, the Bank of Korea had projected the $40,000 milestone would be reached in 2028, but in June it hinted at achieving the target before 2028, and this latest release has pulled the timeline forward by nearly a year.

A Bank of Korea official said, “Despite the Middle East conflict, expanding global AI investment has boosted exports of semiconductors and related machinery and equipment, sustaining positive net export contributions even from the previous quarter’s high levels.” The official added, “We believe demand may continue to exceed supply for the time being. If U.S. interest rates rise, prices could fall, but volumes are increasing, so results should remain strong.”

The gross savings rate also soared to an all-time high. Q2 gross savings rate reached 45.6%, up 3.9 percentage points from the previous quarter — the highest level since related statistics began being published in 1970. During the same period, the household net savings rate rose 0.9 percentage points to 9.7%, while the domestic investment rate fell 1.1 percentage points to 24.2%.

Annual 3% Growth Outlook Gains Support

The Q2 performance bolsters the Bank of Korea’s annual growth forecast of 3.3% for this year. A Bank of Korea official noted, “Arithmetically, if quarter-on-quarter growth averages around 0.2–0.3% in the second half, the annual target can be achieved.”

Earlier in July, Deputy Prime Minister and Minister of Economy and Finance Koo Yun-cheol stated that “the likelihood of achieving 3% annual growth and $40,000 per-capita GNI this year has risen significantly.”

However, it is worth noting that the surge in nominal indicators relies heavily on price factors rather than actual expansion of production capacity. While improved terms of trade from rising export prices temporarily boost real purchasing power, sustained price increases could eventually lead to higher import costs. The trajectory of semiconductor export prices, U.S. AI investment trends, and the won-dollar exchange rate are expected to be key variables shaping South Korea’s growth path in the second half of the year.