South Korea’s Economy Is Surging? Not So Fast—Tariffs Are Still on the Table
South Korea’s Q2 GDP surprised to the upside, but traders shouldn’t get too comfortable. Underneath the surface of this recovery lies a looming tariff risk that could upend FX, bonds, and equity positioning across the board.
At EBC Financial Group, we’re keeping a close watch on how stronger-than-expected growth is colliding with unresolved trade tensions. While headline numbers have improved, cross-asset markets are preparing for a volatile August.
A Solid Print, but No Celebration Yet
Preliminary data from the Bank of Korea (BoK) shows the economy expanded 0.6% quarter-on-quarter in Q2, beating the 0.5% consensus forecast and reversing the 0.2% contraction from Q1. It marks the fastest growth in over a year, giving policymakers temporary breathing room.
The rebound was led by a 4.2% surge in exports, particularly semiconductors and petrochemical products. On the domestic side, private consumption rose 0.5%, with spending up in vehicles and leisure services, while government spending added 1.2%.
However, the investment side tells a more cautious story. Both facility investment and construction investment fell 1.5%, revealing a continued lack of corporate appetite for long-term capex.
According to BoK calculations, net exports and domestic demand each contributed 0.3 percentage points to overall growth—indicating a fragile balance rather than a runaway recovery.
Political Certainty Returns, but Policy Risk Lingers
The economic recovery has also benefited from political clarity. A snap presidential election on 3 June ended months of gridlock after the constitutional court upheld former President Yoon Suk Yeol’s impeachment in April. With the transition now behind Seoul, investor sentiment has firmed—but only to a point.
While institutions are back on track, markets are shifting focus to external policy risks. And the next big pivot is just days away.
August 1: The Tariff Deadline Traders Cannot Ignore
The August 1 deadline tied to ongoing U.S.–South Korea trade negotiations is emerging as the defining market risk for Q3. Back in April, President Donald Trump proposed 25% reciprocal tariffs against Korean exports. Though not yet implemented, these duties—especially on autos and steel—are already creating uncertainty across sectors.
Tensions have escalated recently. A planned meeting with U.S. Treasury Secretary Bessent was cancelled without explanation, with Korean authorities now describing talks as entering a “critical phase.”
Failure to reach a deal by the deadline could trigger immediate tariff escalation. That, in turn, could reignite export volatility, pressure the Korean won (KRW), and weigh heavily on sensitive equity sectors.
As David Barrett, CEO of EBC Financial Group (UK) Ltd, explains:
“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.”
What This Means for Markets
Despite the upside surprise in Q2, the BoK has kept its 2025 GDP growth forecast at 0.8%, citing weak consumption and ongoing trade risks. That restraint has shifted expectations across multiple asset classes.
Rate expectations: With growth improving, the urgency for near-term easing has diminished. Following the BoK’s decision to hold at 2.50% on 10 July, yield curves have begun to steepen as investors reprice duration risk.
FX outlook: The KRW remains vulnerable. While stable for now, its trajectory hinges on how trade negotiations unfold. A breakdown could spark capital outflows and test central bank intervention levels.
Equities: Investors are splitting their bets. Auto and steel stocks may face pressure if tariffs are triggered, while AI-linked tech and domestic demand names could benefit from local stimulus and supportive consumption trends.
Eyes Forward: Volatility Is Still in Play
South Korea’s Q2 rebound is real—but it’s not risk-free. Stronger exports and consumer resilience have bought time, not resolution. Tariff uncertainty, cautious policy signalling, and fragile investment trends keep volatility in play across all major asset classes.
At EBC, we’re guiding clients through this complex landscape with tactical cross-asset strategies. Until clarity emerges on the tariff front, Korea’s outlook remains more fragile than the GDP numbers might suggest.
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.
Disclaimer:
Investment involves risk. The content of this report is not an investment advice and does not constitute any offer or solicitation to offer or recommendation of any investment product.
Publication date:
2025-07-30 07:34:28 (GMT)
