Goldman Sachs Warns of Korean Economic Challenges in 2026

‘China Shock 2.0’ and Deteriorating Export Environment
• Deflationary export surge from China: China’s domestic overcapacity and weak consumer demand have led it to “push out” excess production through cheap exports, exerting global deflationary pressure. Notably, Chinese export prices plunged to record lows in late 2023 (e.g. a 9.7% year-on-year drop in export unit prices in Oct. 2023), even as export volumes rose – a clear sign of China flooding world markets with low-priced goods. This dynamic has been dubbed a “China Shock 2.0,” as China’s subsidized export glut is hollowing out competitors. Goldman Sachs research estimates that for each 1 percentage point of GDP boost China gains from export growth, other countries’ growth may be dragged down by 0.1–0.3 points, with high-tech manufacturing economies hit hardest.
• From complementary to head-to-head competition: South Korea’s trade relationship with China has fundamentally changed. Whereas their industries used to be mutually complementary, they now increasingly overlap and compete in the same products and markets. China has rapidly climbed the value chain and strives to keep core manufacturing at home, meaning Korean firms now face Chinese rivals in areas they once dominated. The two economies have shifted from “complementarity” to “competition,” as observed by experts. This intensified rivalry squeezes Korean exporters’ margins and market share, especially in advanced sectors that Chinese companies (often state-backed and less profit-driven) are aggressively entering. In short, Korea can no longer count on China as a benign trading partner – it’s now a formidable competitor, amplifying external risks to Korean growth.

AI and Semiconductor Boom: Limited Trickle-Down Effect
• Narrow support from tech giants: Booming global demand for AI-related semiconductors (e.g. high-bandwidth memory chips) has indeed provided a lift to Korea’s exports in 2025–26, but this lift is coming from a very narrow base. A few large tech firms – notably the semiconductor titans – are seeing outsized gains. For instance, Korean semiconductor exports surged 43% year-on-year in December thanks to AI data-center demand. Goldman Sachs expects companies like SK Hynix (a key HBM supplier) to maintain dominant market share in cutting-edge AI chips through 2026. However, this boom is highly concentrated in specific firms and product niches, limiting its spillover to the broader economy . Outside the tech sector, many other industries are not sharing in these gains.
• Taiwan’s AI windfall vs. Korea’s reality: Goldman Sachs and other analysts highlight a stark contrast between Taiwan and Korea in the current AI semiconductor cycle. Taiwan’s economy – smaller and far more chip-centric – has been lifted across the board by the AI boom. Explosive demand for high-performance AI chips has propelled Taiwan’s exports, manufacturing and investment, putting its GDP growth on track for the mid-4% range. (In 2025, Taiwan’s growth is estimated above 7%, with AI-related tech shipments a major driver.) This broad-based boost is enabling Taiwan to achieve its fastest growth in years, with benefits spreading to jobs and domestic spending. South Korea, by contrast, cannot rely on AI alone to power the whole economy. Semiconductors, while important, make up a smaller share of Korea’s GDP, so even record-high chip exports have a more modest impact on national growth. In fact, the Asian Development Bank noted that Korea’s industrial output in 2024 was dampened by factors like U.S. export curbs on certain chips (e.g. HBM memory), even as Taiwan’s manufacturing saw a full-fledged boom from AI demand. The upshot: Korea’s AI and tech uptick is real, but it functions more as a supporting pillar than a rising tide lifting all boats.

Structural Weaknesses in Domestic Demand
• Demographics and debt restraining consumers: South Korea’s domestic demand is structurally fragile, weighed down by an aging society and a heavy debt burden. The working-age population is shrinking and household debt is among the highest in the world (over 100% of GDP), which together act as a persistent brake on consumption and growth. The Bank of Korea has found that population aging alone shaved roughly 0.8 percentage points off annual consumption growth over the past decade. As the decline in Korea’s population accelerates, this drag will only increase – potentially reducing consumption growth by up to 1 percentage point per year from 2025 to 2030 due to demographic change . High debt servicing costs and rising income inequality add further headwinds . These factors also erode Korea’s potential growth rate, which has fallen to around 2% or lower, from ~3% a decade ago . In short, Korea’s capacity to generate growth from within (through consumer spending and investment) is structurally diminishing.
• Sluggish domestic sectors (K-shaped recovery): Recent indicators underscore how Korea’s internal economy is lagging its export engine. Business and consumer surveys depict a K-shaped recovery: the export-oriented manufacturing sector is rebounding, but domestically oriented sectors are stagnating or slowing. In late 2025, manufacturing sentiment and output improved thanks to surging tech exports, whereas services and small businesses saw confidence and activity weaken. The Bank of Korea’s outlook index for non-manufacturing plummeted in December, reflecting a slowdown in domestic demand once temporary fiscal boosts faded. Likewise, consumer confidence, while still above long-term norms, has slipped in recent months. Koreans are tightening discretionary spending amid higher interest costs and economic uncertainties. In effect, outside of the AI-led export boom, Korea’s domestic economy has little momentum – private consumption and local services are barely keeping pace. This imbalance leaves the economy vulnerable; without stronger household consumption and broad-based business investment, overall growth remains heavily dependent on the volatile tech cycle.

2026 Outlook: Prolonged Low Growth and Policy Response
• Sub-2% growth expected: Goldman Sachs forecasts only 1.9% GDP growth for South Korea in 2026, underscoring a continuation of sub-par growth for a second straight year. This is below Korea’s estimated long-run potential (roughly 2.0–2.2%), implying the economy will run slightly below capacity. It’s not a recession scenario, but rather an extension of the “slow growth trap” Korea has been in. For context, the Bank of Korea’s official projection is even lower at 1.6% growth in 2026, reflecting caution about exports and domestic demand. Either way, both Goldman and Korean authorities agree that 2026 will likely fall short of a normal 2%+ expansion, barring a sharper global upswing. Key drags include softer demand from China (Korea’s top trade partner), the aforementioned domestic constraints, and fading post-pandemic rebounds. The anticipated growth rate around 1.9% indicates South Korea will grow only marginally faster than 2025 (which is estimated under 1%), and well below the U.S. or global average. Policymakers therefore face pressure to stimulate without exacerbating financial risks.
• Interest rate relief on the horizon: To support the economy, a monetary easing cycle is expected to begin. Goldman Sachs analysts and other observers predict the Bank of Korea will cut its policy rate by 0.25%–0.50% (one or two times) in 2026, reversing some of the earlier tightening. The central bank itself has signaled it is open to rate cuts if growth sputters and inflation stays subdued. In a year-end policy statement, the BOK said it will keep the door open for additional easing in 2026, conditioning moves on careful assessment of inflation and financial stability trends. With inflation now back near the 2% target and the economy weak, there is room for a cautious cut. Lower interest rates would alleviate debt burdens and borrowing costs, helping spur consumer spending and business investment at the margin. However, the BOK must balance this against concerns over capital outflows (a weak won) and housing prices, which have started rising again. Most likely, we’ll see a gradual approach – a quarter-point cut possibly in mid-2026 and another late in the year if downside risks persist.
• Investment implications – hedge bets with bonds: Facing this uncertain outlook, Ma Kyung-hwan, the CEO of GB Investment Advisory who analyzed Goldman’s report, advises a balanced investment strategy. He notes that while semiconductor and AI-related stocks remain attractive (given Korea’s strength in tech, and the global AI upswing), investors should also lock in some gains and rotate into safer assets to hedge against a domestic slowdown. In particular, Ma highlights Korean government bonds as a smart addition to portfolios now. His reasoning: as interest rates start falling, bond prices will rise, providing an offset to any equity downturn. “It’s time to lower your stock weight and increase bonds – Korean Treasuries are a better buy than U.S. Treasuries now,” he said, pointing out that Korea’s bonds have favorable prospects in a rate-cutting environment. If the economy weakens and the central bank is forced to cut rates more aggressively, bondholders could see significant capital gains (since long-term yields would drop sharply). Thus, Ma recommends a barbell approach: maintain exposure to the upside of tech (to capitalize on the AI boom), but concurrently accumulate Korean bonds as a defensive play. This way, an investor can benefit if the economy surprises to the upside, yet also be protected if 2026 turns out more sluggish than hoped. Such a strategy aligns with Goldman’s cautionary outlook – preparing for a challenging 2026 where prudent risk management will be just as important as seeking growth opportunities.