Lee administration tasked with balanced growth in 2026 as polarization deepens

Cars for export are lined up at Pyeongtaek Port, Gyeonggi Province, Jan. 1. Yonhap

By Lee Kyung-min

• Published Jan 5, 2026 4:00 PM KST

AI-driven stock market boom offsets won's weakness and stagnant domestic spending

Korea’s stagnant domestic spending and polarized growth among key growth-driving manufacturing industries, coupled with the won’s weakness relative to the U.S. dollar, are masked by record exports and the artificial intelligence (AI) sector-backed stock market boom, market watchers said Monday.

The Korean economy’s heavy dependence on the semiconductor industry will put the economic drive of the Lee Jae Myung administration to the test, as the weakening won significantly reduces purchasing power and strains the cost of living for many people.

Whether the government’s economic initiatives can steer the country away from chipmaking toward more balanced, inclusive growth amid a wider polarization in assets and income remains to be seen.

To do this, experts urge steady structural reforms such as efficient exit strategies for declining industries and sweeping deregulation to foster new growth drivers.

“On paper, everything looks great,” former Seoul National University (SNU) professor Lee In-ho said.

Korea’s exports exceeded $700 billion for the first time, becoming the sixth economy in the world to do so and joining the ranks of the United States, Germany, China, Japan and the Netherlands. This is a meaningful milestone since Korea has little natural resources and capital.

However, the specifics tell a different story.

Semiconductors now account for about a quarter of total exports, and of the 15 major export items, 10 sectors — everything excluding chips, cars, ships, bio-health and computers — saw their exports decline.

Key industries such as machinery, steel, petrochemicals and batteries have struggled as China’s rapid growth and low pricing weaken Korea’s competitiveness.

External risks remain high. Ahead of the U.S. midterm elections in November, the Trump administration may ramp up trade pressure, with protectionist policies expected to strengthen across major economies.

The problem is, Lee said, even when exports perform well, the benefits no longer trickle down through the economy as they once did.

“Export growth is not creating good jobs as much. The labor market is losing vitality, as indicated by low youth employment. Concerns are growing that large firms are reorienting their capital to bolster investment overseas,” he said.

Lee also said that while the weaker won boosts overseas sales for exporters, small businesses, the self-employed and regular consumers are hit harder by rising import and food prices. “This in turn tightens domestic demand, already reeling from years of post-pandemic high borrowing costs and weak consumption.”

AI, chips to propel stock market in 2026

Despite the benchmark KOSPI topping 4,400 points, a surge of about 80 percent over the past year, concerns linger.

“The Korean equity market is the best-performing major stock market globally,” Standard Chartered Korea strategist Hong Dong-hee said.

Many brokerages are increasingly projecting the index to hit 5,000 points, supported by global liquidity expansion and the Lee administration’s initiatives to invigorate capital markets.

However, the recent months of rally are underpinned and propelled almost exclusively by semiconductors, the global AI boom and data center investment.

Samsung Electronics and SK hynix together drove more than 40 percent of KOSPI’s rise.

While the chip cycle has lifted growth, exports and asset prices, it has also created what some call a “mirage,” whereby weakness across the broader economy is eclipsed by the seemingly unchallengeable growth in semiconductor shares.

“A downturn in the sector is not completely out of the picture,” Hong said. “If it does happen, it could translate quickly into volatility in the financial markets and a sharp slowdown in growth.”

The Korean economy is expected to grow between a range of 1.8 and 2.1 percent this year.

However, the Bank of Korea said that excluding the semiconductor and IT sectors, that growth could be limited to 1.4 percent.

“Regulatory reform and institutional support are needed to nurture future industries, including AI, robotics, autonomous driving and biotechnology, with steady efforts to reorganize and help the orderly closure of traditional manufacturing sectors,” the former SNU professor said.