South Korea: The AI Boom Rewriting Asia’s Advanced Economy

South Korea: The AI Boom Rewriting Asia’s Advanced Economy

South Korea entered 2026 after one of its weakest years of growth in recent memory. Less than a year later, the outlook has changed sharply. A global AI investment boom is driving record demand for Korean semiconductors, lifting exports, investment and economic growth. But the same transformation is making Korea increasingly dependent on a single industry at a time when its population is rapidly ageing, and the global trade environment is becoming less predictable.

From 1% growth to 3.3%

South Korea’s economy grew just 1.0% in 2025, but the Bank of Korea now forecasts growth of 3.3% in 2026 and 2.9% in 2027. The central bank attributes much of the improvement to a semiconductor sector that has performed considerably better than previously expected. Exports and investment are thus growing strongly, while improving income conditions are supporting a gradual recovery in consumption.

The result is unusual for an advanced economy: Korea is experiencing an AI-driven industrial boom powerful enough to materially change the country’s near-term growth trajectory.

Chips sit at the centre of the economy

Semiconductors accounted for 24.7% of total Korean exports in 2025, while total exports reached a record US$709.7 billion. Semiconductor exports reached record levels for a second consecutive year.

Even more strikingly, semiconductors have also become Korea’s largest import category, accounting for 12.3% of imports, sitting slightly ahead of crude oil at 11.9%.

That apparent contradiction reflects Korea’s position inside the global semiconductor supply chain. Korea imports chips and intermediate components while specialising in increasingly sophisticated memory and advanced semiconductor products.

The AI infrastructure boom has therefore become both an export and an investment story.

The other side of the semiconductor boom

The semiconductor boom has transformed Korea’s outlook, but dependence on one highly cyclical industry creates risk.

The Bank of Korea itself identifies the future semiconductor cycle as one of the major uncertainties surrounding its forecast. If global AI infrastructure spending weakens, semiconductor prices fall, or technological demand changes, the forces currently accelerating Korean growth could weaken.

This shows the central tension in Korea’s current economic story: the semiconductor boom is strengthening Korea’s economy, but it is also increasing its dependence on global technology demand.

Australia’s complementary relationship

Australia occupies a very different position in the production chain.

South Korea was Australia’s fourth-largest two-way trading partner in 2025, with trade worth A$67.5 billion, and Australia’s third-largest export market at A$44.2 billion. Australia primarily exports iron ore, coal, natural gas and beef to Korea, while importing products including cars and refined petroleum.

Australia and Korea are structurally complementary: Australia supplies many of the raw materials and energy inputs required by Korea’s industrial economy, while Korea exports higher-value manufactured products.

KAFTA reinforces that relationship. It entered into force in 2014, and once fully implemented in 2033, it will eliminate tariffs on approximately 99% of Australian goods.

The demographic constraint

Korea’s short-term technology boom sits against a much slower-moving challenge.

People aged 65 and above represented 20.3% of the population in 2025, placing Korea above the 20% threshold commonly used to describe a “super-aged” society. Statistics Korea expects that proportion to continue rising.

A shrinking working-age population could constrain labour supply and increase age-related fiscal pressures over the longer term. This means productivity growth and technological investment will become increasingly important as Korea tries to produce more economic output from a smaller workforce.

Energy, inflation and trade risks

Korea also remains heavily dependent on imported energy. That leaves an export-oriented manufacturing economy exposed to movements in global energy prices.

Inflation remains another consideration. The Bank of Korea currently forecasts 2.7% CPI inflation in 2026, with underlying inflationary pressure remaining elevated. In August, it raised the Base Rate by 25 basis points to 3.00%, citing the need to contain inflation while continuing to pay attention to financial-stability risks.

Trade policy adds another external risk. Korea’s growth model depends heavily on international markets, leaving its major manufacturers exposed to changes in tariffs and the broader US-China trade relationship

Closing takeaway

South Korea’s 2026 story is not simply that growth has improved. Instead, it is that AI has changed what is driving that growth.

Semiconductors are lifting exports, investment, and the wider economy strongly enough for the Bank of Korea to forecast growth of 3.3% this year. However, Korea’s dependence on chips is increasing at the same time that its population is ageing and the international trade environment is becoming less predictable.

Overall, the semiconductor boom has given Korea a powerful new growth cycle, but with chips accounting for nearly a quarter of exports, Korea’s economic outlook is increasingly tied to how long the global AI investment boom lasts.