South Korea Raises 2026 Growth Target to 3.0%, Fiscal Expansion Supports a Hawkish BOK
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South Korea Raises 2026 Growth Target to 3.0%, Fiscal Expansion Supports a Hawkish BOK
Nomura believes that, driven by a strong chip cycle and large-scale investment projects, the South Korean government has raised its 2026 GDP growth forecast to 3.0%, and a second supplementary budget may be financed by additional tax revenue rather than new KTB issuance.
- The South Korean government raised its 2026 GDP growth forecast from 2.0% to 3.0% and expects growth to slow to 2.2% in 2027.
- The government expects inflation to rise to 2.6% in 2026 and slow to 2.1% in 2027, while emphasizing that price pressures still need to be alleviated.
- Nomura judges that additional tax revenue, equivalent to about 1% of GDP, may be used for a second supplementary budget, without the need for further KTB issuance.
- If the supplementary budget is implemented more quickly in the second half, Nomura estimates it could add about 0.2 percentage points to the growth outlook.
- Nomura maintains its forecast that the BOK will raise rates by 25bp each in July 2026, October 2026, and January 2027, with a terminal rate of 3.25%.
Report interpretation
Overview
This report analyzes the South Korean government's economic outlook and policy mix for the second half of 2026. The core change is that the government raised its 2026 GDP growth forecast to 3.0%, mainly based on a strong chip cycle, proactive fiscal spending, and three large investment projects, while also proposing a long-term goal of raising potential growth from below 2% to 3%.
Core views
Nomura believes the South Korean government may use additional tax revenue to push through a second supplementary budget in support of the 3% growth target, and that this budget will most likely not require further KTB issuance. For monetary policy, this may not necessarily trigger consecutive BOK rate hikes in the near term, but proactive fiscal spending will reinforce the BOK's hawkish stance; with the inflation forecast broadly unchanged, Nomura maintains its quarterly pace rate hike forecast.
Analysis framework
The report uses a macro policy interpretation framework, combining government GDP and inflation forecasts, sources of fiscal funding, supplementary budget arrangements, tax over-collection, fiscal multipliers, and the BOK policy reaction function to assess the impact on South Korea's growth, inflation, government bond supply, and interest rate path.
Methodology notes
Assess upside growth risks through differences between government forecasts and Nomura forecasts
The government raised its 2026 growth forecast to 3.0%, above Nomura's below-consensus 2.5% forecast; if the supplementary budget is implemented, it could bring about 0.2 percentage points of upside risk to the growth forecast.
Finance fiscal expansion through additional tax revenue
The report assumes additional tax revenue equal to about 1% of GDP, with the second supplementary budget supported by this revenue, and estimates the growth impact based on a fiscal multiplier of 0.2-0.3.
Fiscal expansion reinforces a hawkish stance but does not necessarily lead to consecutive rate hikes
Nomura expects the BOK may raise its 2026 GDP forecast, but since the inflation outlook has remained broadly unchanged since the May meeting, it still forecasts 25bp hikes each in July 2026, October 2026, and January 2027.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- South Korea Macro GrowthDirectly benefits from the upgraded GDP forecast, the semiconductor cycle, and fiscal investment projects.
- Strengths
- Strong chip cycle, government promotion of large-scale investment projects and regional development, and the potential growth target raised to 3%.
- Weaknesses
- Growth is expected to fall back to 2.2% in 2027, and the long-term target still requires structural reforms and project execution support.
- Comparison
- The government's 3.0% growth forecast for 2026 is above Nomura's 2.5% forecast.
- Risks
- Fiscal allocation, confirmation of tax over-collection, inflation, and changes in the global semiconductor cycle may affect delivery.
- KTBIf the second supplementary budget is financed by additional tax revenue, further KTB issuance may not be necessary.
- Strengths
- No need for additional KTB issuance would help ease supply pressure.
- Weaknesses
- Proactive fiscal spending will support the BOK's hawkish stance, potentially putting upward pressure on rates.
- Comparison
- Compared with fiscal expansion financed through additional government bond issuance, tax-financed expansion has a smaller impact on KTB supply.
- Risks
- If the plan for using additional tax revenue changes or fiscal strategy shifts, KTB issuance expectations may be revised again.
- South Korean Policy RateThe upgraded growth forecast and fiscal expansion reinforce the BOK's hawkish stance.
- Strengths
- Solid growth momentum gives the BOK a macro backdrop for continued rate hikes.
- Weaknesses
- The inflation outlook has not changed materially, so Nomura believes it is unlikely to trigger consecutive rate hikes.
- Comparison
- Nomura maintains a quarterly 25bp hiking pace rather than a more aggressive path of consecutive hikes.
- Risks
- If inflation is higher than expected or fiscal spending is stronger, the BOK reaction function could become more hawkish.
- South Korea Semiconductor and AI-related IndustriesA strong chip cycle, large chip clusters, AI data centers, and physical AI projects are anchor points of the growth strategy.
- Strengths
- Policy support is concentrated on next-generation industries, supply chain resilience, domestic production incentives, and regional investment.
- Weaknesses
- The scale and operating rules of some projects have not yet been finalized.
- Comparison
- Semiconductor and AI projects have higher priority in the government's long-term growth target than general fiscal spending.
- Risks
- There is uncertainty around global demand, supply chains, investment execution, and implementation of policy details.
- KRW and South Korean Financial MarketsThe government lists exchange rates, interest rates, housing, and macro-financial stability as key policy targets.
- Strengths
- Policy emphasizes risk management and structural reform, including financial markets, FX markets, pensions, and the public sector.
- Weaknesses
- Proactive fiscal policy and rising rates may create pressure on asset prices and financing costs.
- Comparison
- Compared with pure growth stimulus, the policy package also emphasizes macro-financial stability.
- Risks
- FX volatility, housing market pressure, inflation stickiness, and external risks may weaken policy effectiveness.
Key data
- South Korean Government 2026 GDP Growth Forecast3.0%Raised from the previous 2.0%, reflecting the chip cycle and proactive fiscal spending.
- South Korean Government 2027 GDP Growth Forecast2.2%The government expects growth in 2027 to slow relative to 2026.
- South Korean Government 2026 Inflation Forecast2.6%The government emphasizes that inflation remains elevated and has pledged to strengthen efforts to ease price pressures.
- South Korean Government 2027 Inflation Forecast2.1%The government expects inflation to decline in 2027.
- Long-term Potential Growth Target3%Current BOK and OECD estimates are below 2%.
- Scale of Additional Tax Revenueabout 1% of GDPNomura believes this could serve as the funding source for the second supplementary budget.
- Potential Growth Contribution of the Supplementary Budgetabout 0.2 percentage pointsBased on a fiscal multiplier assumption of 0.2-0.3.
- Nomura 2026 GDP Growth Forecast2.5%The report says this forecast is below consensus and faces upside risk.
- BOK Forecast Rate Hike Path25bp each in July 2026, October 2026, and January 2027Nomura maintains a quarterly rate hike pace.
- Terminal Rate Forecast3.25%Corresponding to the BOK rate hike path above.
Impact & implications
In terms of asset implications, proactive fiscal policy and the improving chip cycle enhance South Korea's growth outlook, but also strengthen the case for the BOK to maintain a hawkish stance. If the supplementary budget does not rely on new KTB issuance, pressure on government bond supply may be relatively limited; however, faster fiscal spending, still-high inflation, and the upward path of policy rates will continue to affect interest rates, exchange rates, housing, and financial market stability.
Risks
- Clearer information on the scale and use of additional tax revenue still awaits corporate tax prepayments in August.
- The government's long-term fiscal strategy is expected to be announced in late August or early September, and budget details and debt repayment arrangements remain uncertain.
- Inflation remains at an elevated level; if price pressures do not ease, the BOK may turn more hawkish.
- If implementation of the supplementary budget is slow or the fiscal multiplier is lower than assumed, the growth contribution may fall short of expectations.
- Execution of the semiconductor cycle, AI investment projects, and supply chain policies faces external demand and implementation risks.
- Risks in interest rates, FX, and the housing market may constrain the room for proactive fiscal policy.
What to watch
- Corporate tax payments in August and confirmation of tax over-collection.
- Details of the South Korean government's long-term fiscal strategy in late August or early September.
- The size of the second supplementary budget, its use of funds, and whether it is fully financed by additional tax revenue.
- Whether the BOK raises its 2026 GDP forecast to close to 3% at the August 27 meeting.
- Whether the BOK hikes by 25bp each in July 2026, October 2026, and January 2027 as Nomura forecasts.
- Progress of large chip cluster projects in semiconductors, AI data centers, physical AI, and the southwestern region.