Economic Outlook KDI Economic Outlook 2025-1st Half May 14, 2025
The Korean economy is projected to grow by 0.8% in 2025, weighed down by a contraction in construction and deteriorating trade conditions. Growth is expected to pick up to 1.6% in 2026 as domestic demand gradually recovers, despite the lingering effects of trade disputes.
- Consumer price inflation is forecast at 1.7% in 2025, reflecting subdued economic activity and lower oil prices. It is expected to rise slightly to 1.8% in 2026 as the decline in international oil prices moderates and domestic demand strengthens gradually.
- Private consumption is projected to grow slowly, by around 1.1% in 2025, followed by a modest recovery to 1.6% in 2026 as political instability eases and the effect of rate cuts begin to materialize.
- Equipment investment is expected to maintain moderate growth of 1.7% in 2025 and 1.6% in 2026, supported by sustained robust demand for semiconductor-related investment and a gradual easing of the high interestrate stance, despite elevated external uncertainty.
- Construction investment is projected to decline by 4.2% in 2025, following a 3.0% contraction in 2024. However, the downturn is expected to ease in 2026, with investment increasing by approximately 2.4% as the effects of improved construction orders received gradually materialize.
- Exports are projected to weaken amid a contraction in global trade triggered by higher U.S. tariffs.
- Despite improved terms of trade, the current account surplus is expected to narrow due to weakening exports.
- Employment growth is projected to slow from 160,000 in 2024 to 90,000 in 2025 and 70,000 in 2026, amid persistent demographic headwinds and weakening labor market conditions driven by heightened uncertainty.
Ⅰ. Current Economic Conditions
- □ The Korean economy has exhibited signs of deceleration amid growing domestic and external uncertainty.
- · GDP declined by 0.1% year-on-year in the first quarter, while remaining broadly flat at near zero on a seasonally adjusted quarter-on-quarter basis for the fourth consecutive quarter.
- · By sector, construction has contracted sharply, and growth momentum in both manufacturing and services has slowed.
- □ Domestic demand has yet to show meaningful recovery, as political instability continues to weigh on consumer sentiment and external uncertainty heightens.
- · Growth in private consumption has slowed, particularly in service sectors such as accommodation and food services, amid subdued consumer sentiment.
- · Equipment investment recorded steady gains, but business sentiment weakened due to rising external uncertainty, indicating a deterioration in overall investment conditions. Construction investment saw a deeper decline, further contributing to weakness in the sector.
- · Amid a slowdown in economic activity, inflation has remained around 2%, while employment growth has been modest due to worsening declines in the construction and manufacturing sectors.
- · Meanwhile, the downward pressure from high interest rates and sluggish construction orders received has eased somewhat, suggesting that the weakness in domestic demand may moderate over time with a lag.
- □ Despite robust semiconductor exports until recently, overall exports have weakened amid sluggishness in other sectors, and export conditions are expected to deteriorate further following the US tariff hikes.
- · Goods exports (volume) declined, while import growth (volume) also moderated amid subdued domestic demand.
- · External soundness remains robust, supported by a sustained large current account surplus and net foreign assets amounting to nearly 60% of GDP. In April, the U.S. significantly raised tariffs, leading to a sharp increase in trade-related uncertainty.
- · The IMF has substantially revised down its global growth forecasts, particularly for the U.S. and China, reflecting the adverse impact of escalating trade tensions. Slowing global growth has weighed on international oil prices.
- □ In light of these domestic and external circumstances, the Korean economy is projected to face slower growth, as exports contract amid deteriorating trade conditions.
- · Domestic demand remains on a weak growth trajectory, but its sluggishness is expected to ease somewhat going forward, supported by declining interest rates, improving consumer sentiment, and increased construction orders received.
- · However, export conditions have deteriorated sharply, as the US tariffs were raised on a wide range of products and trade-related uncertainty has risen to unprecedented levels.
- □ Given the ongoing economic slowdown, an accommodative macroeconomic policy stance is considered appropriate.
- · Monetary policy warrants a more accommodative stance to mitigate potential disinflationary pressures stemming from weakening domestic and external demand.
- · Given that fiscal policy is already somewhat expansionary, as evidenced by a large operational fiscal deficit of 86.4 trillion won (equivalent to 3.3% of GDP), further increases in government spending should be approached with caution.
- □ At the same time, considering the continued decline in Korea’s potential growth trajectory, it is essential to maintain policy efforts aimed at structural economic reform.
- · Korea’s potential growth rate is estimated to be in the upper 1% range in 2025 and is projected to fall further to near zero by the 2040s.
- · To address this trend, efforts to raise productivity—such as easing regulatory barriers and enhancing labor market flexibility—are needed.
- · In addition, the macroeconomic policy stance should take into account the ongoing weakening of potential growth.
Ⅱ. Domestic Economic Outlook for 2025~2026
1. Major Assumptions on External Conditions
- □ The global economy is assumed to experience slower growth in 2025 and 2026, reflecting a contraction in international trade.
- · Recent IMF projections indicate that the deteriorating trade environment, driven by the U.S. protectionist stance, is expected to limit global growth to 2.8% in 2025, down from 3.3% in 2024, followed by a modest recovery to 3.0% in 2026.
- · U.S. tariff policy toward Korea is assumed to maintain a baseline tariff of 10%, along with existing item-specific rates.
- □ The import price of crude oil (Dubai) is assumed to decline from $80 per barrel in 2024 to $69 in 2025, and further to $66 in 2026, reflecting subdued global demand.
- □ The Korean won, in terms of the real effective exchange rate, is assumed
to remain constant, showing no significant fluctuations from current levels.
2. Domestic Economic Outlook for 2025~2026
- □ The Korean economy is projected to grow by 0.8% in 2025, weighed down by a contraction in construction and deteriorating trade conditions. Growth is expected to pick up to 1.6% in 2026 as domestic demand gradually recovers, despite the lingering effects of trade disputes.
- · Private consumption is projected to grow slowly, by around 1.1% in 2025, followed by a modest recovery to 1.6% in 2026 as political instability eases and the effect of rate cuts begin to materialize.
- · Equipment investment is expected to maintain moderate growth of 1.7% in 2025 and 1.6% in 2026, supported by sustained robust demand for semiconductor-related investment and a gradual easing of the high interest rate stance, despite elevated external uncertainty.
- · Construction investment is projected to decline by 4.2% in 2025, following a 3.0% contraction in 2024. However, the downturn is expected to ease in 2026, with investment increasing by approximately 2.4% as the effects of improved construction orders received gradually materialize.
- · Exports are projected to weaken amid a contraction in global trade triggered by higher U.S. tariffs.
- · Despite improved terms of trade, the current account surplus is expected to narrow due to weakening exports.
- □ Consumer prices are expected to remain on a slow growth path, reflecting the economic slowdown and lower oil prices.
- · Headline inflation is forecast to reach 1.7% in 2025 and approximately 1.8% in 2026, as the decline in international oil prices moderates and domestic demand gradually recovers.
- · Core inflation, excluding food and energy, is also expected to remain low at 1.8% in 2025, before edging up to 1.9% in 2026.
- □ Employment growth is projected to slow from 160,000 in 2024 to 90,000 in 2025 and 70,000 in 2026, amid persistent demographic headwinds and weakening labor market conditions driven by heightened uncertainty.
-
· The unemployment rate is expected to rise slightly from 2.8% in 2024 to 3.0% in both 2025 and 2026.
3. Risks to the Outlook
- □ The Korean economy is facing an unusually high level of uncertainty, largely contingent on U.S. tariff policy and the responses of its trading partners.
- ·If the U.S. maintains high tariff levels and trading partners implement retaliatory measures, trade tensions could intensify further, placing additional downward pressure on Korea’s economic growth.
- ·Conversely, export conditions could improve markedly if negotiations conclude on favorable terms.
- □ Domestically, if the financial soundness of construction firms deteriorates amid a weakening housing market, the recovery in construction investment could be delayed.
- · The housing market has been slowing, as indicated by a sharp increase in unsold newly completed units in non-capital areas and a continued decline in housing sale prices.
- · In this context, delays in restructuring real estate project financing loans, along with further deterioration in the financial soundness of construction firms, could disrupt construction activity, thereby undermining the pace of recovery in construction investment.
Ⅲ. Policy Recommendations
1. Fiscal Policy
- □ Given the continued large deficits in the operational fiscal balance, further government spending should be approached with caution to safeguard fiscal soundness.
- · The operational fiscal balance remained in significant deficit through 2023 and 2024, despite the end of the COVID-19 crisis.
- · Following the finalization of the supplementary budget, the 2025 operational fiscal deficit has been revised upward to 3.3% of GDP. A larger deficit remains possible, given weakening tax revenues amid slowing economic activity.
- · With the budget already set on an expansionary path, caution is warranted regarding any further increase in government spending.
- □ Preemptive efforts are needed to contain the excessive burden on fiscal soundness, in view of weakening tax revenue conditions resulting from declining potential growth and the statutory guarantee of national pension benefits.
- · Notwithstanding the rapid increase in the national tax burden, Korea’s medium- to long-term growth slowdown, driven by demographic shifts, is expected to lead to a sharp rise in public debt.
- · Despite the revision of the National Pension Act, fund depletion remains likely, and the statutory guarantee of pension benefits could significantly increase the fiscal burden on future generations.
- · Given the potential for significant fiscal deterioration over the mediumto long-term, institutional reforms are needed in advance to prevent excessive expansion of fiscal deficits.
2. Monetary Policy
- □ A more accommodative monetary policy stance is considered appropriate to address disinflationary pressures.
- · There is downward pressure on prices due to the recent economic slowdown, and it may intensify amid rising external uncertainty.
- · As external soundness remains strong and financial system risks are expected to remain limited, monetary policy can be conducted with a focus on price stability.
- · In view of these factors, monetary policy should remain accommodative to ease downward pressure on prices that may arise from weakening demand.
3. Financial Policy
- □ Despite elevated domestic and external uncertainty, the financial system remains broadly stable.
- · The risk of systemic instability in the financial market is considered low in the short term, as key soundness indicators across major financial sectors exceed regulatory thresholds.
- · The household debt-to-GDP ratio has followed a moderate downward trend, supported by strengthened macroprudential measures, including the second-stage stress DSR rule and tighter supervision of household lending.
- · In addition, the CDS premium, which reflects sovereign default risk, remains low, and external soundness is assessed to be relatively strong, supported by a sizable current account surplus of around $100 billion annually and net foreign assets equivalent to approximately 60% of GDP.
- □ Financial support should be withheld from structurally non-viable firms, and macroprudential policy should be pursued with consistency.
- · While the asset quality of financial institutions has improved somewhat, supported by policy rate cuts and ongoing restructuring in real estate project financing, delinquency rates remain elevated for household loans, loans to sole proprietors, and project financing.
- · Financial support for vulnerable sectors should be applied selectively, using differentiated criteria based on borrowers’ repayment capacity, to minimize moral hazard.
- · To ensure medium- to long-term financial system stability, it is important to implement the third-stage stress DSR rule as scheduled in the second half of the year, and to continue strengthening borrower-level soundness by reducing exemptions from DSR rules for jeonse loans and policy-based lending programs.
Related video
Security code
![captcha]()
We reject unauthorized collection of email addresses posted on our website by using email address collecting programs or other technical devices. To access the email address, please type in the characters exactly as they appear in the box below.
KDI Staff Information
Please enter the security code to prevent unauthorized information collection.
KDI Staff Information
KDI Staff Information