South Korean exports rebounded in June, driven by solid chip demand

South Korean exports rebounded to 4.3% year on year in June (vs -1.3% May, 5.1% market consensus). By category, six out of 15 major export items rose. Semiconductor exports hit a record, rising 11.6%, while computers (15.2%), auto (2.3%), auto parts (2.4%), bio-health (36.5%), and vessels (63.4%) all rose. We anticipate that semiconductors and vessels will be the primary contributors to growth this year, driven by rising prices and robust pre-orders. Automobile and automotive parts exports also gained. Strong electric vehicle exports to the EU and solid used-car exports partially offset the decline of US exports. However, we expect auto exports to remain soft due to tariffs and increased production in the US.

Meanwhile, oils (-2.0%) and petrochemicals (-15.5%) continued to drop. The primary factors behind this weakness are likely US tariffs and unfavourable price effects. But the waning competitiveness of Korean products over recent years also provides explanations. Thus, we expect oil and chemical exports to remain a main drag for an extended period.

By destination, exports to the US (-0.5%) and China (-2.7%) dropped while shipments to other regions increased. Exports to ASEAN (2.1%), EU (14.7%), Japan (3.0%), and Taiwan (31.0%) saw growth. We found that frontloading wasn't as stong as we saw in March. Instead, Korean exporters appear to be diversifying markets, while global supply chain reshuffling is influencing export trends.

Imports also rose 3.3% YoY in June (vs -5.3% in May, 5.6% market consensus). Energy imports declined -14.6% thanks to falling commodity prices. Non-energy imports rose 7.9%. Chip-making equipment imports rose 27.9%, suggesting equipment investment will improve in the coming months. The trade surplus widened to 9.1 billion USD in June. Exports have been have volatile throughout this year, yet the trade balance improved significantly in the second quarter. This should contribute positively to the second quarter GDP.

Balancing weaker-than-expected activity in May with a better trade surplus in June, we adjusted quarterly GDP growth from 0.4% quarter on quarter, seasonally adjusted, to 0.3% for the second quarter. Consumption recovery was less than expected, and manufacturing was still negatively impacted by political uncertainty both at home and abroad. The expected equipment investment also fell short of projections.

However, it is projected that the current quarter's growth will accelerate more rapidly than initially expected to 1.2%. Supportive fiscal policy, increases in capital goods imports, and strong performance in the local equity market should increase private spending and investment during the 2nd half of the year. Thus, we revised up the annual GDP growth forecast to 1.0% YoY from 0.9%.