South Korean consumer sentiment jumped in May, signalling growing optimism about the country’s economic prospects ahead of a new government taking office in early June and possible interest rate cuts.

According to the Bank of Korea, the composite consumer sentiment index rose sharply to 101.3 in May from 93.3 in April ING reports in a note. This surge marks a return to optimistic territory, with readings above 100 indicating more positive than negative responses.

All six components of the index rose, with the outlook for the domestic economy climbing 18 points - the largest increase.

The boost in sentiment is being attributed to growing expectations that the incoming government, set to be formed after the June 3 election, will deliver economic support and policy stability. “Consumers are feeling hopeful about economic stabilization under the new leadership,” analysts are reported as saying by ING.

Despite global trade tensions and declining exports, consumer spending appears poised for a rebound. Meanwhile, Korean households signalled increased willingness to spend on overseas travel, dining, and leisure, pointing to an early recovery in retail and services.

Inflation expectations eased, falling to 2.6% from 2.8%, bringing them closer to the Bank of Korea’s 2% target. This decline could give the central bank room to resume cutting rates, with a 25 basis point reduction widely anticipated during the May 29 policy meeting.

Analysts say falling borrowing costs could further lift consumer demand. “Lower interest rates are expected to ease debt-servicing burdens for households, helping to sustain the recovery,” one economist noted.

Exports under pressure

However, the upbeat consumer data contrasts with a more downbeat picture for trade and industry. Industrial production and export data due later this week are expected to highlight persistent weakness, with early May figures pointing to a 4% year-on-year contraction in exports; a key factor in the South Korean economic landscape.

Semiconductor exports may remain resilient, thanks in part to tariff exemptions – for now - and ongoing investment in AI, but other categories - including Korea’s huge automobile industry and consumer goods - are expected to take a hit.

BoK set to shift forecasts

As a result, the Bank of Korea is expected to revise its GDP outlook downward as it weighs the impact of tariffs and sluggish Q1 growth. Economists expect the central bank to cut its 2025 GDP forecast to around 0.8%, down from its earlier projection.

Still, the central bank is likely to stress the uncertainty tied to US trade policy and the fiscal stance of the incoming government.

At the same time, inflation in the first quarter came in hotter than expected, prompting analysts to anticipate a revision in the BoK’s inflation forecast from 1.9% to 2.1%. That increase is largely attributed to businesses passing on rising input costs to consumers.

With growth still weak and inflation settling near the 2% mark, markets are betting that the Bank of Korea will cut interest rates further, potentially reaching 2.0% by year-end. However, much will depend on the policy direction of the new government elected early next week after months of political uncertainty following a late-2024 attempted call for martial law by now impeached former President Yoon Suk-Yeol.