SEOUL – South Korea's economy is navigating a period of significant turbulence, with new data from august 2025 revealing a manufacturing sector strained by US trade policies, even as the nation's critical semiconductor industry posts record-breaking performance.

The latest figures paint a challenging picture for the trade-reliant nation. In August, South Korea’s factory activity contracted for the seventh consecutive month, according to the S&P Global Purchasing Managers Index (PMI). The index sat at 48.3, remaining below the 50-mark that separates growth from contraction. This prolonged slump is largely attributed to a sharp decline in overseas demand, particularly from the United States.

Export growth slowed considerably in August, rising just 1.3% year-over-year to $58.40 billion, missing a forecast of 3.0%. A key factor was a steep 12.0% drop in exports to the US, the largest such fall since may 2020. This followed the implementation of new 15% US tariffs on August 7, impacting core south korean products including automobiles, machinery, and steel.

However, the headline export numbers were buoyed by a powerful counter-current. According to South Korea's trade ministry, semiconductor exports, which are exempt from the new tariffs, surged to a record $15 billion in August. This remarkable performance underscores the dual nature of the current economic landscape, where specific sectors thrive while others face direct pressure from international trade disputes.

Adding to the complexity, the US has also tightened its policies on technology exports. Washington has revoked waivers that allowed south korean chip giants like Samsung and SK Hynix to send American semiconductor manufacturing equipment to their facilities in China without a license. While the US is expected to grant licenses for maintaining current operations, the policy shift prevents capacity expansion or technology upgrades at key plants, including Samsung’s memory facility in Xi’an and SK Hynix’s plants in Wuxi and dalian. This move could influence the companies' long-term strategic decisions regarding their significant operations in China.

In response to these headwinds, president Lee Jae Myung's administration is shifting toward an expansionary fiscal stance. The government has proposed an 8.1% increase in its 2026 budget to 728.0 trillion won ($524.44 billion), the largest rise in four years. A significant portion of this new spending is earmarked for developing the country's artificial intelligence (AI) sector, signaling a strategic bet on future technologies to spur growth.

This challenging august data follows a period of cautious optimism. Earlier in the year, global investment banks like JP Morgan had raised their growth forecasts for South Korea, citing better-than-expected export and manufacturing figures at the time. JP Morgan revised its annual growth forecast to 0.7%, expecting an annualized growth of 1.8% in the second half of the year. However, other institutions like the Korea Development Institute (KDI) have remained more guarded, reducing their projections due to trade uncertainties.

Meanwhile, domestic inflation remains relatively stable. Consumer prices rose 2.1% year-on-year in july 2025, a slight slowdown from the previous month and in line with economists' expectations.

As a global leader in electronics, automobiles, and shipbuilding, with exports accounting for nearly half of its gross domestic product, South Korea’s economic health remains deeply intertwined with global demand and trade dynamics. The current environment, marked by targeted US tariffs and a booming semiconductor market, presents a complex test of resilience and adaptability for the nation's policymakers and corporate titans.