South Korea's first-quarter economy expanded amid the growing popularity of artificial intelligence and global chips.

The gross domestic product rose 1.7% from the previous quarter, the Bank of Korea said Thursday, beating Reuters' estimate of a 1% growth.

The increase in GDP can be mainly attributed to exports of information technology (IT) products, including semiconductors, which jumped 5.1%. The imports of these items were up 3% due to increases in machinery and equipment and in motor vehicles.

Major Korean chipmakers have been making huge profits due to the growing demand for AI. SK Hynix (KRX:000660) recorded a 398% year-on-year surge in its first-quarter net income attributable to shareholders to 40.3 trillion won. The company's sales during the period soared 198% year over year to 52.6 trillion won.

Meanwhile, facilities investment climbed 4.8% amid increases in machinery and transportation equipment, the BoK said.

Construction investment inched 2.8% higher, while government consumption rose by 0.1%.

Min Joo Kang, ING's senior economist for South Korea and Japan, said chip exports are expected to gain momentum over the coming months, offsetting the disruptions caused by the Middle East conflict. Total exports climbed 50% year on year, with chip exports soaring 182%, she said, citing April export data. However, South Korea's economy is still facing risks such as higher inflation caused by oil price hikes and energy disruptions.

"The Korean government implemented a temporary export ban on Naphtha, and Korean companies increased oil and gas imports from outside the Middle East," Kang said. "Despite these measures, manufacturing activity still cannot be sustained at full capacity."

Kang said chip exports may begin to slow down in the second half of the year.

Krystal Tan, ANZ's Asia economist, also believes the semiconductor industry could help cushion the shock brought by the war in Iran, but growth may also weaken in the coming quarters as the impact of the conflict starts to sink in and the imbalances between supply and demand remain.

"Importantly, large-scale new memory manufacturing capacity is only expected to begin materializing from the second half of 2027, suggesting the current cycle still has room to run," Tan said. "Continued strength in semiconductor exports would in turn provide Korea with a degree of insulation from external shocks that many other energy-importing economies lack,"