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KDI repeats warning of downside economic pressure with tariff turmoil

Published: 10 Mar. 2025, 17:04

SHIN HA-NEE
[email protected]

Pictured is a construction site for an apartment complex in Seoul on Feb. 18. [NEWS1]

The Korea Development Institute (KDI) warned of growing downside risks as it once again sounded the alarm over the burgeoning pressure weighing on Asia’s fourth-largest economy.

While noting that consumer confidence has been recovering from the fallout of President Yoon Suk Yeol's martial law declaration in December, the state economic think tank highlighted mounting trade uncertainty surrounding the implementation of tariffs by U.S. President Donald Trump.

“Downside risks for the economy have expanded due to the slowdown in the construction sector and deteriorating trade environment,” the KDI stated in the March edition of its monthly economic trend report released on Monday, citing economic indicators for January.

“The economic implications of the political uncertainty have been moderating, yet worsening external conditions are pushing up downside risks,” it noted.

This marked the third month in a row that the KDI has addressed the growing economic risks. While the institute had noted the slow recovery of domestic demand and rising economic uncertainties in its report issued on Dec. 9, the report began to highlight “growing downside risks” in January, tracking the aftermath of President Yoon Suk Yeol’s martial law declaration and the start of the Trump administration.

Korea’s industrial output fell 3.5 percent on year in January, weighed down by the persistent construction slowdown and fewer business days, according to the KDI.

Production at factories, mines and utilities declined 4.1 percent on year, with the solid 20.8 percent growth in semiconductor production offset by a contraction in electronic parts and machinery.

The construction industry, in particular, plunged 27.3 percent, an even steeper decline from December’s 7.4 percent yearly drop, partly due to a base effect from the previous year.

The KDI noted that indicators for economic and business sentiment have been gradually recovering from steep falls in December, but also added that the possibility of trade contraction has expanded due to escalating trade tension.

While the consumer sentiment index still remained below the 100 threshold, meaning that pessimists outnumbered optimists, the reading rebounded from December’s 91.2 points to 95.2 in January.

Facility investment remained relatively steady, but the growing external uncertainty could limit facility investment in the future, the KDI warned.

The think tank stressed that higher tariffs on exports to the United States could weigh on already slowing export growth.

“Higher tariffs on cars, electronic devices and machinery could significantly impact Korea’s exports, given those items' proportion within the total exports,” the KDI suggested.

Among Korea’s total exports last year, shipments to the United States took up 18.7 percent. Cars and automotive parts shipped to the United States made up 6.3 percent of Korea’s total exports, while electronic devices came to 2.6 percent and general machinery, 2.2 percent.

Containers are stacked at a port in Korea's southeastern city of Busan on March 2. [YONHAP]

Meanwhile, the KDI has recently clashed with the Bank of Korea (BOK), another key research body for the country’s economic policy, over the necessity of an additional budget. While BOK Gov. Rhee Chang-yong has repeatedly called on the National Assembly to pass a supplementary budget between 15 trillion ($10.5 billion) to 20 trillion won — which is expected to drive GDP growth by an additional 0.2 percentage points — the KDI contended that “there are hardly the necessary legal grounds for a supplementary budget.”

“Supplementary budgets can only be warranted when there is a significant change in internal or external conditions, such as a recession or a mass unemployment,” said Jung Kyu-chul, director of the KDI's Office of Macroeconomic Analysis and Forecasting, during a press briefing on Feb. 11.

Rhee directly addressed the comment during a Q. and A. session following a rate-setting meeting on Feb. 25, saying, “Such a stance from the KDI is a bit puzzling,” and urged the KDI for “an explanation for the decision.”

BY SHIN HA-NEE [[email protected]]