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KDI slashes Korea's 2025 economic growth forecast to under 1%

Published: 14 May. 2025, 17:26 Updated: 14 May. 2025, 20:12

Ads for a clearance sale are posted on a store in Myeong-dong, a major shopping district in central Seoul, on May 11. [YONHAP]

The Korea Development Institute (KDI) halved its 2025 economic growth outlook for the country to 0.8 percent from 1.6 percent in just three months, citing the combined impact of rising U.S. tariffs and faltering domestic demand.

It marks the first time a major Korean research body has issued a sub-1 percent growth projection for the year.

In its semiannual economic outlook released Wednesday, the state-run think tank projected 0.3 percent growth for the first half and 1.3 percent for the second half.

It also estimated that the nation’s GDP contracted 0.1 percent in the first quarter, reinforcing concerns of a broader economic slowdown. The Bank of Korea (BOK) previously put that figure at minus-0.2 percent.

“We didn’t anticipate the scale of tariff hikes back in February,” said Jung Kyu-chul, director of the KDI’s economic forecast division.

“External factors such as tariffs lowered the forecast by 0.5 percentage points, while internal shocks including sluggish domestic demand pulled it down by another 0.3 percentage points,” he said.

Job seekers receive employment counseling at the Seoul Western Employment Welfare Plus Center in Mapo District, western Seoul, on May 14. [NEWS1]

Among projections issued by government agencies, research institutes and international organizations — excluding foreign investment banks — the KDI’s 0.8 percent forecast is the lowest so far.

The Korean government has maintained its 1.8 percent forecast from the start of the year, while the BOK predicted 1.5 percent growth in February. Last month, the International Monetary Fund cut its estimate for Korea to 1 percent from 2 percent in February. The Organization for Economic Cooperation and Development and the Asian Development Bank are holding at 1.5 percent.

The KDI attributed the downward revision to a slump in construction, heightened external uncertainty from U.S. tariffs, weaker exports and sluggish domestic demand.

Construction investment is expected to decline 4.2 percent this year. Private consumption is projected to inch up by just 1.1 percent, roughly matching last year’s figure. The number of new jobs is forecast to fall to 90,000 from 160,000 last year.

The KDI forecasts that exports of goods will decline 0.4 percent this year. The institute’s projections assume a baseline scenario that includes 10 percent general tariffs and 25 percent tariffs on items like steel, aluminum and automobiles.

The thank tank also factored in the U.S.-China tariff agreement announced Monday, which includes a 30 percent tariff on certain Chinese goods. However, it did not account for the country-specific reciprocal tariffs that remain on hold until July 8.

“If the mutual tariff moratorium expires and negotiations with the United States fail to deliver tariff reductions, the growth outlook could deteriorate further,” Jung said.

A notice on an empty building in Myeong-dong, central Seoul, indicates space available for lease on April 20. [YONHAP]

The KDI urged the government to exercise caution in ramping up fiscal spending.

The institute expressed a reserved stance on the prospect of an additional supplementary budget, saying it “should be approached with caution unless the economic situation worsens significantly.”

It also called for “a more accommodating” monetary policy, arguing that “further interest rate cuts are necessary to address downward pressure on inflation.”

The KDI projected next year’s growth at 1.6 percent.

“Next year, political uncertainty is expected to ease and interest rate cuts will start to take effect — this will resolve some of the weakness in construction orders and gradually recover domestic demand,” Jung said. “Still, 1.6 percent growth doesn’t signal a full rebound.”

The KDI warned that Korea’s potential growth rate will likely continue its downward trend due to demographic shifts and could fall near zero by the 2040s.

Translated from the JoongAng Ilbo using generative AI and edited by Korea JoongAng Daily staff.
BY KIM WON [[email protected]]