The Korea Development Institute (KDI) has lowered its growth forecast for the South Korean economy by 0.8 percentage points (p) for this year, marking the first adjustment in three months. The revised economic forecast presented in February estimated the growth rate at 1.6%, which has now been drastically reduced to 0.8%, halving the previous figure. KDI's analysis indicates that the intensifying trade pressures from the United States are stronger than expected, and the prolonged decline in consumer sentiment following the martial law period at the end of last year has resulted in a 'double whammy'.
In the '2025 mid-year economic outlook' released on the 14th, KDI projected South Korea's growth rate for this year at 0.8%. The forecast for next year's growth rate is also set at 1.6%. It is anticipated that the country will experience low growth this year and that a trend of low growth will continue into the next year.
KDI quickly revised down its growth forecast for 2025 from 2.0% in November last year to 1.6% in February and then 0.8% in May. KDI provided an overall assessment of the current state of the South Korean economy, stating, 'The domestic market is showing no visible recovery as the psychological downturn stemming from political instability persists and external uncertainties expand.'
KDI projected that inflation would rise by 1.7% in 2025 due to economic slowdown and falling oil prices, and then increase to around 1.8% in 2026 as the decline in international oil prices moderates and steady recovery in the domestic market is indicated.
In terms of employment, KDI predicted that the increase in the number of employed persons will shrink from 160,000 in 2024 to 90,000 in 2025 and further down to 70,000 in 2026 due to deteriorating employment conditions as a result of growing uncertainties.
Regarding consumption, KDI analyzed that 'the increase in private consumption is slowing down, centered on services such as accommodation and food, due to declining consumer sentiment.' On investments, KDI stated, 'While facility investments showed a healthy growth trend, investment conditions are deteriorating as corporate sentiment is dampened due to expanding external uncertainties,' and 'construction investment is being increasingly affected, leading to deeper sluggishness.'
KDI explained that among the 0.8% cut made from the February forecast, 0.5% was influenced by external factors and 0.3% by internal factors. Jeong Gyu-cheol, head of KDI's economic forecast office, stated regarding the factors for the downward adjustment of the growth rate, 'Broadly speaking, there are external shocks and internal shocks,' adding, 'External shocks are reflected in exports. Internally, consumption and construction investments have been poor.'
KDI explained that while preparing the mid-year economic outlook, it also reflected the U.S.-China trade agreement signed on the 12th. It assumed the current trade situation with 'a general tariff of 10% applied, item-specific tariffs applied, and reciprocal tariffs temporarily suspended at 15%.' Jeong mentioned that if South Korea and the U.S. reach a 'July package' agreement and trade conditions improve, the growth rate could be raised, while if reciprocal tariffs apply after July 9, the growth rate could decrease.
Considering the current economic situation, KDI advised that macroeconomic policy should be implemented with an accommodative stance, particularly emphasizing the need for relaxed currency policy. KDI noted, 'It is desirable to operate in a more accommodating manner to respond to the downward pressure on prices.'
However, it stressed that a cautious approach should be taken regarding fiscal policy. It pointed out, 'Given the significant consolidated fiscal balance without social security fund deficit (86.4 trillion won, 3.3% of GDP), fiscal policy is already somewhat relaxed,' adding, 'The government must approach additional increases in government expenditure with caution.' It further stated, 'Considering the deterioration in revenue conditions as a result of declining potential growth rates and the legal guarantee of national pension payments, it is necessary to proactively strive to avoid significant damage to fiscal soundness.'
Regarding financial policy, KDI remarked that the overall situation is stable, but also indicated that support for financially troubled corporations with low survival prospects should be restrained.
It also stated, 'Policy efforts for economic structural reform must continue,' noting that efforts are needed to improve productivity, including reducing barriers to market entry and labor market rigidity.