The government has forecast South Korea's economic growth rate for this year at 1.8%. This projection is 0.1 percentage point (p) lower than the 1.9% suggested in the Bank of Korea's revised economic outlook last November.
Last year's growth rate was estimated to be 2.1%. This is a downward revision of 0.5 percentage points (p) compared to the 2.6% presented when the latter half of the year economic policy direction was announced in July. The primary reason is that exports, which drove South Korea's economic growth in the first half of last year, showed a slowing trend in the second half.
In 2025, the government predicts that the growth rate will be lower than last year, as the trend of slowing export growth continues, and the external environment uncertainty increases with the inauguration of the second Trump administration.
The government forecasts that the growth momentum in exports will slow, and domestic demand will find it challenging to recover in a short time due to prolonged high inflation and interest rates. While the task of revitalizing exports and boosting domestic demand has been assigned, the leadership to address this is missing amid political turmoil and impeachment proceedings at the end of the year.
◇ government lowers growth rate forecast by 0.4 percentage points in five months
On the 2nd, the government finalized and announced the 2025 economic policy direction at an expanded economic ministers meeting presided over by Choi Sang-mok, Acting President and Deputy Prime Minister and Minister of Strategy and Finance.
In this economic policy direction, the government presented this year's gross domestic product (GDP) growth rate at 1.8%. This is the same level as South Korea's potential growth rate for 2025 announced earlier by the Bank of Korea.
The government analyzes that the export conditions will worsen this year due to intensifying competition in key sectors such as semiconductors, and the shift in U.S. trade policy will act as a downward factor for growth. While domestic consumption and facility investment are expected to improve moderately with the easing of high inflation and interest rates, construction investment is forecasted to continue its decline.
A Ministry of Strategy and Finance official noted, “Uncertainty is high regarding the timing of the construction market recovery and the impact of the domestic political situation on household and corporate sentiment. Exports are expected to face adjustments in the semiconductor upcycle with intensified competition. Due to the impact of trade environment uncertainty, the export growth rate is expected to slow next year compared to this year.”
◇ “consumer recovery amid monetary policy shift… construction downturn may ease in the second half”
The government forecasts that private consumption, which grew only 1.2% last year, will see a slightly better situation at 1.8% in 2025. Last year's consumption of goods was sluggish due to accumulated high inflation and interest rates. In 2025, it is expected that households' real purchasing power will improve, showing a gradual recovery. Of course, the situation is not entirely favorable. There is a possibility that the improvement may be constrained by the contraction in consumer sentiment due to their expansion of internal and external uncertainties and high household liabilities.
The government expects facility investment to revive thanks to the easing of the Central Bank's monetary policy. Last year's facility investment increased by only 1.3%, but the government's outlook is for a 2.9% increase this year. A Ministry of Strategy and Finance official stated, “The demand for investment in advanced sectors and the easing of monetary tightening will revive facility investment.” "Machinery is expected to improve due to demand for advanced processes in semiconductors and transport equipment due to the sequential introduction of deferred volumes from 2024.”
Construction investment is expected to decline for two consecutive years. Last year, the construction industry was sluggish, centered on building, as the impact of the 2023 order and construction commencement decline was reflected in performance with a time lag. This year, the trend of construction downturn is also forecasted to continue. However, there is a little optimism that the recent improvement trend in leading indicators such as orders may ease the downturn after the second half.
The current account is expected to show a surplus of $80 billion. Last year's current account significantly expanded its surplus to record a level of $90 billion, thanks to a favorable balance of goods. It is anticipated that the surplus will shrink this year due to the slowdown in export growth. However, the International drop in oil prices is expected to constrain import growth, maintaining a significant surplus trend.
◇ prices to rise 1.8%… employed to increase by 120,000
The increase in the number of employed people is forecasted at 120,000. This figure is a decrease of 50,000 compared to the forecast of 170,000 for 2024. The government projects that the increase in the number of employed will shrink due to the expansion in the decline of the working-age population and the economic downturn.
By sector, employment in the service industry is expected to continue its upward trend due to the expansion of IT and care demand. However, a decrease is anticipated in construction and manufacturing due to the impact of construction downturn and export slowdown. The employment rate is expected to continue increasing in terms of women and the elderly, driven by economic activity.
The consumer price inflation rate was set at 1.8%. It is expected that the inflation rate will moderate compared to last year's increase of 2.3%.
Last year, the impact of climate change in the first half exerted some upward pressure on agricultural product prices. However, as stability was achieved in the second half, the inflation rate recently fell to the 1% range. Core inflation, which shows the trend of prices, also shows a stable trend within the 2% range.
The government expects this trend of slowing price increase to continue into 2025. With international oil prices and other supply-side price pressures not being significant, the pressure from economic factors is also expected to be limited.
However, the Ministry of Strategy and Finance explained that uncertainties remain, such as fluctuations in oil prices due to geopolitical risks and import price increases resulting from recent exchange rate fluctuations.