Korea’s growth forecast cut to 1.8% as weak recovery continues

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Korea’s growth forecast cut to 1.8% as weak recovery continues

Published: 02 Jan. 2025, 11:16 Updated: 05 Jan. 2025, 18:27

SHIN HA-NEE
[email protected]

Audio report: written by reporters, read by AI

Acting President and Minister of Economy and Finance Choi Sang-mok speaks during an economic ministerial meeting at the government complex in central Seoul on Jan. 2. [MINISTRY OF ECONOMY AND FINANCE]

The government projected Korea’s economy to grow 1.8 percent this year, a more pessimistic outlook than the central bank’s forecast, citing a sluggish recovery in domestic demand, slowing export growth and mounting uncertainties.

The projection was announced on Thursday as the Ministry of Economy and Finance published the Economic Policy Directions report for 2025 amid the ongoing political chaos surrounding President Yoon Suk Yeol's impeachment proceedings. The report, which is typically issued around the year-end or early January, was set to be released on Monday but was delayed due to the deadly Jeju Air plane crash on Sunday.

Stability takes priority

The primary theme of this year’s Economic Policy Directions is “to keep our economy as stable as possible,” said acting President and Minister of Economy and Finance Choi Sang-mok during an economic ministerial meeting on Thursday.

“The Korean economy is expected to face more grave uncertainties than ever with a new U.S. administration coming in, coupled with the ongoing domestic political situation,” said Choi, noting, “With the growth projected to slow to 1.8 percent, difficulties in livelihoods may aggravate, and [the current situation’s] impact on the country’s sovereign credit rating is also concerning.”

Choi promised to prioritize the mitigation of burdens on everyday livelihoods, while also focusing on enhancing financial infrastructure to attract foreign capital ahead of Korea’s planned inclusion in the FTSE Russell World Government Bond Index (WGBI) this year.

The Finance Ministry expected the real GDP to grow 1.8 percent this year, following 2.1 percent growth estimated for last year. This marked a 0.4 percentage point downgrade for this year’s forecast from the initial projection announced in July, while the final rate for 2024 was a 0.5 percentage point drop from the estimation issued at the same time.

The ministry's 1.8 percent projection is lower than the Bank of Korea’s 1.9 percent and the International Monetary Fund’s 2 percent.

Consumer prices are expected to rise 1.8 percent this year, a moderation from the previous year’s 2.3 percent, according to the Finance Ministry. The number of employed individuals is estimated to increase by 120,000 this year, smaller growth compared to last year’s 170,000.

“While exports face growing downside risks due to external factors, the recovery of domestic demand, despite a moderation of inflation and interest rates, will be suppressed by a slowdown in the construction sector and a contraction in economic sentiment,” said Kim Beom-seok, the first vice minister of economy and finance, during a press briefing on Dec. 27.

A customer shops for vegetables at a discount mart in Seoul on Dec. 31. [NEWS1]

Additional measures on table

The 2025 Economic Policy Directions consist of four major pillars: accelerating economic recovery with the swift implementation of budget plans, safeguarding the sovereign credit rating, addressing external uncertainties involving the trade environment and bolstering industrial competitiveness.

The government has been repeatedly vowing an “unprecedented” pace of budget execution this year in order to promptly boost the persistently slow domestic demand.

According to the latest plan, the government aims to pour in 18 trillion won ($12.2 billion) through budget execution, state-backed investments and policy financing to boost the economy.

As part of the plan, the Finance Ministry completed a budget allocation of 11.6 trillion won ahead of the beginning of the fiscal year, which allows government offices to swiftly execute the allotted budgets at the start of the year. The plan includes expediting subsidy roll-outs, boosting the tourism industry with sales festivals and the extension of the Korea Electronic Travel Authorization exemption through the end of the year, and stimulating the slow construction sector with increased housing supply and lower taxes on properties in non-Seoul regions.

Moreover, enhancing the accessibility of the domestic financial market for foreign investors is another key agenda item, as the government has been refining the financial infrastructure for foreign exchange transactions and bond investments ahead of Korea’s inclusion in the WGBI, one of the world's leading bond indexes that consists of 26 countries' sovereign bonds, scheduled for November.

The government also aims to draw in foreign investments with incentive measures including a temporary increase in subsidy caps this year.

During the Thursday meeting, Choi indicated that the government may announce additional measures to drive the economy early this year.

“Given the heightened internal and external uncertainties, the government will review the economic environment in general in the first quarter, including the new U.S. administration’s policy directions and the domestic economic situation, and devise additional measures if necessary,” said the acting president.

Updated, Jan. 2: Added details about the Economic Policy Directions for 2025, and comments from the Ministry of Economy and Finance.

BY SHIN HA-NEE [[email protected]]