Strong GDP, Weak Investment, and Uncertain Trade: South Korea's Tug of War Continues

South Korea's economy just pulled off a stronger-than-expected second quarter, but traders aren't cheering just yet. Beneath the surface of that 0.6% quarterly GDP growth, deeper tensions are building—from falling investment to the rising threat of U.S. tariffs.

At EBC Financial Group, we're seeing a classic tug of war playing out: solid short-term data on one side, unresolved structural and geopolitical risks on the other. For cross-asset participants, the direction forward depends on the next week's headlines.

GDP Beats Forecast, Driven by Exports and Consumption

According to Bank of Korea (BoK) data released on 24 July, GDP rose 0.6% quarter-on-quarter, surpassing the 0.5% consensus and bouncing back from a 0.2% contraction in Q1. It's South Korea's strongest quarterly performance in more than a year.

Much of that momentum came from exports. Shipments surged 4.2%, led by semiconductors and petrochemical products. At home, private consumption climbed 0.5%, reflecting increased spending on motor vehicles and cultural services. The public sector added its own boost, with government spending up 1.2%.

Taken together, net exports and domestic demand each contributed 0.3 percentage points to overall growth—a sign of balance, but also of limitations.

Investment Slips, Undermining the Recovery Narrative

Despite the positive headline figure, areas of economic weakness remain visible. Facility investment and construction investment both declined by 1.5%, highlighting ongoing fragility in corporate confidence and infrastructure development.

This is critical. While consumer demand and exports can kick-start a rebound, sustainable long-term growth requires capital commitment. Right now, that's missing. Investors are still hesitant—and that hesitancy is reflected in how businesses are deploying capital.

Political Stability Returns, but Tariff Risks Take Centre Stage

After months of political limbo, the domestic front has stabilised. A snap presidential election on 3 June closed the chapter on April's political turmoil, when the constitutional court upheld former President Yoon Suk Yeol's impeachment. Markets initially welcomed the resolution, but attention has since shifted to a more unpredictable challenge: external policy risk.

The spotlight is now on 1 August, the deadline for the current round of trade talks with Washington. Back in April, President Donald Trump proposed a 25% reciprocal tariff on Korean goods. While not yet enforced, sector-specific duties—especially on automotive and steel—have already hurt confidence.

Hopes of progress were recently dented when a scheduled meeting between Korean officials and U.S. Treasury Secretary Bessent was cancelled without notice. With officials now calling the situation a "critical phase", traders are bracing for sharp moves depending on how talks unfold.

Markets React: FX, Rates, and Equities on Alert

The BoK may have hit pause on rate cuts, but markets are not standing still. After holding its policy rate at 2.50% on 10 July, the central bank is signalling a wait-and-see approach. Meanwhile, short-term yields have adjusted upwards, reflecting a drop in rate-cut expectations after the GDP beat.

David Barrett, CEO of EBC Financial Group (UK) Ltd, highlights the cross-asset sensitivity:

"South Korea's rebound is built on firm export momentum, but markets shouldn't assume this removes downside risk. Growth, policy caution, and tariff uncertainty are converging at once. That's what makes this moment especially sensitive for cross-asset positioning."

That sensitivity is particularly evident in FX. The Korean won (KRW) remains exposed to sudden shifts depending on the tariff outcome. A favourable deal could lift the currency. A breakdown may spark renewed outflows and test central bank support.

A Market at a Crossroads

South Korea's economic recovery is genuine, but incomplete. Solid consumer demand and strong exports have helped reverse Q1's contraction—but they haven't eliminated downside risk. Investment remains soft, and with the August 1 tariff deadline approaching, uncertainty is building.

At EBC, we're advising clients to stay flexible. While near-term growth has improved, volatility remains a central theme. Until trade talks conclude, South Korea's macro outlook remains balanced precariously between opportunity and disruption.

Disclaimer: This article reflects the observations of EBC Financial Group and all its global entities. It is not financial or investment advice. Trading in commodities and foreign exchange (FX) involves significant risk of loss, potentially exceeding your initial investment. Consult a qualified financial adviser before making any trading or investment decisions, as EBC Financial Group and its entities are not liable for any damages arising from reliance on this information.