South Korean data points to firm first-quarter growth, but Iran risks abound

Korea’s industrial production rebounded more than expected by 5.4% month-on-month, seasonally-adjected, in February (vs revised -2.4% in January, 1.5% market consensus). The output rebound was concentrated in the semiconductor sector (28.2%), more than offsetting declines in electronics (-7%) and autos (-1.4%). We believe external demand for AI chips remains strong, but supply chain disruptions and rising input costs may slow activity if the Iran war continues.

Naphtha shortages are a major concern for the petrochemical sector for now. But second-round impacts will likely affect more manufacturing sectors. The government restricted naphtha exports starting March 27, but this merely balances import shortages. Markets estimate that naphtha exports account for about 10% of total supply. Their role as feedstock for petrochemicals could significantly disrupt manufacturing supply chains. Although alternative supply sources may help, the manufacturing sector could still face higher costs. Our 2Q26 GDP forecast has been revised downward since the war began. Downside risks have increased for the second quarter and beyond.

Facility investment gained 13.5% in February, with transportation equipment (40.4%) and machinery (3.8%) up. Construction investment also rose 19.5%, with both building (17.1%) and civil engineering (25.7%) rising sharply. Forward-looking orders data showed improvement. In a three-month comparison, machinery and construction orders rose by 2.6% and 17.4% each.

We expect exports to rise quite sharply by 47% in March. The first 20 days' export outcome showed chip exports surging 164%. We believe global oil supply challenges have not affected chip exports to date. However, rising commodity prices have led to a faster increase in imports (15%). Faster export growth should widen the trade surplus in March.

Given today’s strong February data and a solid March export outlook, we maintain our 0.6% quarter-over-quarter GDP growth forecast for 1Q26. However, we recognise that downside risks for 2Q26 GDP are increasing.