The Korea Development Institute (KDI), a state-run research institute, assessed that Korea's economy has entered an expansion phase exceeding its potential growth rate this year, driven by strong semiconductor exports. Accordingly, the institute said the need for expansionary fiscal policy to further stimulate the economy is low, and instead called for flexible monetary policy, including interest rate hikes to counter high inflation.
In its "First-Half 2026 Economic Outlook" released Thursday, KDI projected this year's gross domestic product (GDP) growth at 2.5%. The institute forecast 3.1% growth for the first half and 1.9% for the second half, raising its February projection of 1.9% by 0.6 percentage points. Next year's growth rate was forecast at 1.7%.
The semiconductor super cycle is the key reason behind the upward revision. Chung Kyu-chul, head of KDI's Macroeconomic and Financial Policy Research Department, said, "The positive impact from semiconductor exports outweighed the negative impact from the Middle East war," adding, "Semiconductors accounted for more than 0.3 percentage points of the upward revision."
If currently insufficient supply capacity expands rapidly, growth could rise further on the back of export increases. Meanwhile, the Middle East war was analyzed as a factor lowering the growth rate by 0.5 percentage points, while the first supplementary budget was assessed as raising it by 0.2 percentage points.
If this growth path materializes, KDI believes there is little room for additional stimulus measures such as a second supplementary budget. "Economic expansion and stimulus are not compatible terms," Chung stressed. "If the Middle East war eases to some degree, expansionary fiscal policy for stimulus is largely unnecessary."
The semiconductor boom is expected to push this year's current account surplus to a record high. KDI projected the current account surplus will reach $239 billion this year and $213.7 billion next year. Compared with last year's surplus of $123.1 billion, this year's figure is nearly double. Total exports were projected to grow 4.6% this year and 2.2% next year.
On the price front, upward pressure is evident. The consumer price inflation forecast for this year was raised to 2.7%, up 0.6 percentage points from the February projection of 2.1% before the outbreak of the Middle East war. This reflects demand-side pressure from improving private consumption compounded by supply-side pressure from rising international oil prices. Consumer price inflation is expected at 2.2% next year, while core inflation is projected at 2.5% this year and 2.3% next year.
KDI also signaled the need for rate hikes in response. "If high inflation persists, interest rates should be raised," Chung said. "But whether that will be this month or in the second half is difficult to say definitively under current uncertainty."
By spending component, private consumption was projected to grow 2.2% this year and 1.5% next year. Improved income conditions and the effects of government support policies are expected to offset inflationary pressure. Facility investment is expected to post relatively high growth of 3.3% this year and 2.4% next year, driven by expanding semiconductor-related demand. Construction investment is projected to grow just 0.1% this year due to rising construction costs, before recovering to 1.1% next year. The number of employed people is expected to rise by 170,000 both this year and next, supported by a domestic demand recovery despite demographic changes.
Uncertainty factors remain. KDI analyzed that a prolonged Middle East war could worsen the growth trajectory through disruptions in raw material supply and rising production costs. The forecast is based on Dubai crude oil import prices of $91 per barrel this year and $82 next year, and an assumption that the won-dollar exchange rate will remain at the current level (1,475 won). A potential general strike by Samsung Electronics' labor union is another variable. "It is difficult to quantify without assumptions about intensity and duration," Chung said, adding, "But if it actually takes place, the direction itself would be negative."
The need for fiscal restructuring was also emphasized. With basic pension spending and local education grants expected to exceed 100 trillion won next year, KDI called for restructuring basic pensions to focus on vulnerable elderly groups and for local education grants to be linked to changes in the school-age population.
