South Korea’s economy expanded at its fastest pace in nearly six years during the first quarter, driven by a global surge in artificial intelligence infrastructure demand. However, the Bank of Korea has responded to the semiconductor-led boom by raising interest rates to curb emerging demand-driven inflation pressures.
First-Quarter GDP Surges Past Market Expectations on Semiconductor Demand
South Korea’s economy delivered its fastest growth in nearly six years during the first quarter, smashing forecasts as booming chip exports rode a global surge in artificial intelligence investment. Gross domestic product expanded 1.7% in the January-March quarter from the prior three months, according to the Bank of Korea, blowing through the median Reuters poll estimate of 1.0% by a wide margin.
The higher growth was powered by a 5.1% jump in exports, led by shipments of IT components including semiconductors used in artificial intelligence infrastructure. This expansion marked the strongest quarterly pace since the third quarter of 2020 when Asia’s fourth-largest economy was rebounding from the COVID-19 pandemic shock.
From a year earlier, the economy grew 3.6%, compared with a 1.6% expansion in the fourth quarter and beating a median estimate for 2.7% growth. Facility investment gained 4.8% after shrinking 1.7% in the last quarter of 2025, while private consumption rose 0.5% after showing tentative signs of recovery early in the year as household confidence improved. Government expenditure grew just 0.1%.
Record Chip Profits Contrast with Rising Energy and Price Pressures
Red-hot demand for Korean chips linked to the artificial intelligence boom underpinned the broader economy during the period. SK Hynix posted a more than five-fold jump in first-quarter operating profit to a record high, driven by demand from global tech giants to build AI data centers. That followed rival Samsung Electronics’ eightfold jump in quarterly profit earlier in the month.
Yet the export boom brings distinct complications. A Bank of Korea research report warned that income growth among certain businesses and households driven by the semiconductor sector could lead to widespread and prolonged inflation. The central bank raised its base interest rate for the first time since the pandemic, emphasizing the need for preemptive measures against rising prices.
Jeong Won-seok, head of the central bank’s Price Trend Team, and colleagues published a report analyzing four periods since 2000 when demand-side pressures significantly raised prices. The researchers defined demand-driven high inflation as periods when the actual economic growth rate exceeded potential growth, and the core inflation rate stayed above 2.5% year-on-year for at least two quarters. These included past periods of post-crisis recovery and pre-crisis booms.
Preemptive Monetary Tightening and the Risk of Demand-Side Inflation
Governor Shin Hyun-song cited the necessity of addressing demand-side inflationary pressures as the rationale for the unprecedented back-to-back rate hikes.
“We are stopping with a hoe what could have required a spade.”
Governor Shin Hyun-song, Bank of Korea
Economists distinguish demand-side inflation from supply-side inflation, which stems from rising production costs. When demand-side inflationary pressure is high, businesses can more easily pass cost increases on to prices. The core inflation rate has risen steadily from 2.0% at the start of the year to 2.2% in April, 2.5% in May, and 2.6% in July, marking its highest level since December 2023.
The central bank researchers found that personal service prices, such as travel, accommodation, and food services, have shown higher inflation rates compared to historical periods. When personal services drive core inflation, the risk of broad-based price increases intensifies.
Middle East Conflict Shadows the Export-Led Outlook
Despite strong first-quarter figures, economists warn that the outlook has darkened as energy shocks and supply disruptions sap business and consumer confidence. As the world’s fourth-largest oil importer, South Korea is heavily exposed to the Middle East conflict, which has already pushed consumer prices back above the central bank’s target to 2.2% in March.
Going forward, we see downside risks in second quarter GDP due to higher oil price causing damage to consumption and corporate capex,
said Stephen Lee, an economist at Meritz Securities, as reported by Reuters.
The robust performance initially provided a signal for policy tightening, with analysts noting that the bond market quickly priced in a reduced likelihood of a growth slowdown. However, the intersection of soaring semiconductor export values and external energy shocks leaves policymakers balancing unprecedented corporate windfalls against the domestic cost of living.
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