[2026 Economic and Financial Outlook Focus] ① "Barely at Potential Growth Rate"... Key Variables for Korea's Economy in the Year of the Blue Horse

Leaving Behind Ultra-Low Growth, Seeking a Rebound to Around 2%
Improved Private Consumption, Domestic Demand Recovery, AI Industry Strength, and Base Effect as Key Drivers
Concerns Over High Exchange Rate Persist... Annual Average Expected to Stay Around 1,400 Won
Soaring Home Prices, "Fundamental Measures Needed to Address Supply Constraints"

Editor's NoteThe Year of the Blue Horse has dawned. This year, the Korean economy is set to shift its focus toward genuine growth, leaving behind last year's period of ultra-low growth triggered by the aftermath of the 12·3 Martial Law Crisis. However, compared to the past, when periods of darkness in growth were often followed by much brighter rebounds, this year’s recovery is expected to be only modest. Key variables to watch include global supply chain changes driven by the spread of protectionism, the ongoing momentum of artificial intelligence (AI) that is currently boosting Korea’s semiconductor exports, as well as issues such as the high exchange rate and real estate market instability. The banking sector faces a challenging year, as policies to curb household lending are expected to put downward pressure on profits, while competition in corporate lending is intensifying. The insurance sector is also likely to see its profitability and soundness threatened by sluggish core business and tighter regulations. In these tough conditions, the keys for financial authorities in terms of policy and supervision will be household loan regulations, productive finance, and consumer protection. The authorities plan to maintain the overall cap on household loans while focusing on regulatory easing and incentives to promote productive finance. In this four-part series, we will examine the major challenges that Korea's economy, financial industry, and policies must overcome in 2026, the Year of the Blue Horse.

This year, the Korean economy is expected to aim for a rebound in the growth rate to around 2%. However, persistent high exchange rates and continued instability in the real estate market remain key variables that could shake the economy in 2026. In the long term, diversifying the export structure, which is currently heavily dependent on semiconductors, and reducing the negative effects of polarization amid an ultra-aging society are also cited as critical tasks.

Korea's Economic Growth Rate in 2026: Seeking a Rebound Around 2%

Korea's GDP growth rate shrank by -0.2% in the first quarter of last year due to the aftermath of the 12·3 Martial Law Crisis, but rebounded to 0.7% in the second quarter and reached 1.3% in the third quarter, escaping the 0% range. For the full year, the growth rate is estimated to have been around 1%.

Most forecasts expect Korea’s economic growth rate to rebound in 2026, but the strength of the rebound will be weaker than in the past. This year, major institutions are projecting Korea’s growth rate to be around its potential growth rate, at about 2%. The Organisation for Economic Co-operation and Development (OECD) forecasts 2.1%, the ASEAN+3 Macroeconomic Research Office (AMRO) projects 1.9%, the Bank of Korea, International Monetary Fund (IMF), and Korea Development Institute (KDI) each forecast 1.8%, while the Asian Development Bank (ADB) expects 1.7%.

Factors supporting the rebound include a recovery in domestic demand led by improved private consumption due to expansionary fiscal policy, continued strength in AI-related industries, and the base effect from last year’s slowdown. The Korea Institute of Finance stated, "Private consumption is expected to recover moderately thanks to low interest rates and improved consumer sentiment, while government consumption will also return to its long-term average as a result of fiscal expansion." LG Business Research Institute predicted, "Facility investment will increase due to the newly established National Growth Fund, expanded government investment in social overhead capital (SOC), and rising demand for high value-added semiconductors. Construction investment, which was sluggish last year, is also expected to turn positive for the first time in five years, thanks to the base effect and a recovery in orders."

Export vehicles and containers are waiting to be loaded at Pyeongtaek Port in Gyeonggi. Photo by Kang Jinhyung

For 2026, the government has set total expenditures at 728 trillion won, an increase of 8.1% over the previous year’s main budget, with investments planned for growth-driving sectors such as AI and advanced industries. However, some have expressed concerns that the expansionary fiscal policy does not sufficiently take into account plans for fiscal soundness and the increase in expenditures due to population aging, raising worries about potential negative effects on Korea’s economic growth in the medium to long term.

Exports are expected to continue supporting economic growth this year, but trends will likely diverge by industry. Exports of semiconductors and other AI-related products are expected to remain strong, while traditional key industries such as petrochemicals, steel, and home appliances are projected to recover more slowly due to weakened global demand and intensified competition with China. There are also concerns that export growth could slow in the medium to long term. The International Financial Center pointed out, "Although optimism still prevails regarding the AI industry, which is driving Korea's exports, a mismatch between corporate investment and profit realization, as well as concerns over excessive debt, could combine with other risk factors to destabilize the overall financial market." Calls for structural reform, including diversifying the industrial structure away from semiconductors, are also being raised.

Overall improvement is expected, but given that last year’s growth rate was only around 1% due to an economic slowdown, the pace of recovery this year is likely to be slower than in the past. The Korea Institute of Finance noted, "Compared to previous cases-such as after the global financial crisis and the COVID-19 pandemic-when growth rates above 4% were achieved following a recovery in private consumption and a rebound in facility investment after periods of weak growth below 1%, this year’s rebound is expected to be relatively modest."

Concerns Over High Exchange Rate Persist... 2025 Average at a Record 1,421.97 Won, What About This Year?

Concerns about a high exchange rate remain an ongoing issue in 2026. At the end of last year, the won-dollar exchange rate surged past 1,480 won, but as foreign exchange authorities made every effort to prevent excessive depreciation of the won, the year closed at 1,439.0 won on a weekly closing basis. This is 33.5 won lower than the end of 2024, when the aftermath of the 12·3 Martial Law Crisis was at its peak (1,472.50 won). However, the annual average exchange rate for last year soared to 1,421.97 won, setting a new all-time high.

Experts predict that while the government’s domestic investment and foreign exchange stabilization tax support measures will likely limit excessive depreciation of the won this year, the exchange rate will generally remain around 1,400 won. Kwon Amin, a researcher at NH Investment & Securities, explained, "The newly introduced tax support for the Returnee Investment Account (RIA) is intended to encourage individuals to shift their overseas stock investments back to the domestic market, while the introduction of forward contracts for individual investors and new capital gains tax deductions for currency hedging are designed to promote currency hedging during overseas investments and thus directly reduce dollar outflow pressure." He added, "However, the period and scale of these measures are limited, and structurally, the preference for dollar assets due to the interest rate differential between Korea and the US, as well as the prolonged high exchange rate, must be taken into account." He also noted that it remains to be seen whether these measures will trigger a large-scale sell-off of US stocks and a return to the domestic stock market. Raising the exemption rate for overseas subsidiary dividend income to 100% could also increase the likelihood of potential dollar sales from retained earnings being released into the market.

LG Business Research Institute predicted that the won-dollar exchange rate would remain high in the first half of this year due to continued capital inflows into the US stock market and uncertainty over US-bound investments, but would gradually decline to an annual average of around 1,400 won, thanks to bond inflows following Korea’s inclusion in the World Government Bond Index (WGBI) and a current account surplus.

Meanwhile, although the burden on the real economy from the rising exchange rate is increasing, consumer prices are expected to move around the inflation target (2.0%) due to falling international oil prices. The Bank of Korea forecasts this year’s consumer price inflation at 2.1%, AMRO projects 1.9%, and the Korea Institute of Finance expects 1.8%. The Bank of Korea’s forecast matches last year’s inflation rate (2.1%), as it expects that the upward pressure from the higher exchange rate and easing domestic demand weakness will offset the downward pressure from falling oil prices. The Korea Institute of Finance highlighted the possibility of a slowdown in global trade and oil prices, as well as a potential decline in the won-dollar exchange rate if the US enters a rate-cutting cycle.

View of apartment buildings in downtown Seoul from Namsan, Seoul. Photo by Yonhap News

Real Estate Market Instability: "This Year, Measures to Address Supply Constraints Must Be Supplemented"

Instability in the real estate market is also a key variable for the Korean economy this year. In response to last year’s overheating of the real estate market, the government rolled out a series of measures: the June 27 demand suppression measures, the September 7 supply measures, and the October 15 high-intensity measures, which designated all of Seoul and 12 areas in Gyeonggi Province as regulated or overheated speculation zones. Nevertheless, home prices in major areas of Seoul continue to rise, and instability persists. AMRO pointed out that Korea’s housing policy this year needs to be supplemented to fundamentally address supply constraints. Additional measures suggested include easing regulations on reconstruction and redevelopment in high-demand areas and lifting greenbelt restrictions. Amid an ultra-aging society, asset polarization centered on the housing market is also cited as a medium- to long-term challenge that Korea must address.

Other external variables affecting the Korean economy include global supply chain changes. The IMF and others have warned that if the spread of protectionism originating in the United States and the US-China rivalry lead to supply chain fragmentation and entrenched inefficiencies, the related costs could reach 1 trillion dollars annually, and global economic growth could fall by 0.3 percentage points. The OECD also noted, "Changes in global supply chains place a greater burden on exports and could dampen corporate investment." AMRO commented, "The Korean economy is particularly highly integrated with global supply chains in the semiconductor sector. While Korea’s strong trade and investment links with major countries are an advantage, these could become vulnerabilities if trade conflicts and geopolitical tensions intensify."