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Korea on track to slip below 1% growth for widest gap with global average since 1998

Published: 22 May. 2025, 07:00

Workers load and unload containers at Incheon New Port in Incheon on May 16. [NEWS1]

Korea’s economy is on track to post sub-1 percent growth this year, signaling the largest gap with the global average since the Asian financial crisis, as trade tensions and weak domestic demand weigh heavily on recovery prospects.

The World Bank projects global growth at 2.7 percent in 2025, while the Korea Development Institute (KDI) recently forecast Korea’s growth at 0.8 percent — a 1.9 percentage point difference. If this holds, it would mark the widest gap since the 7.7 percentage point difference in 1998.

Forecasts by eight major global investment banks, compiled by the Korea Center for International Finance last month, also put Korea’s growth at an average of 0.8 percent, matching the KDI estimate.

While Korea occasionally trailed the global average in past years, the gap remained narrow.

That changed in 2021, when the country began consistently underperforming: by 1.8 percentage points in 2021, 0.5 in 2022, 1.4 in 2023 and 0.7 in 2024. This year’s projected gap would be the most severe since the 1997 crisis.

The 2021 figure was partly due to base effects, as Korea’s economy contracted less than others in 2020 during the Covid-19 pandemic. But current headwinds reflect deeper structural challenges.

Korea’s heavy reliance on exports leaves it especially vulnerable to global trade disruptions.

Exports accounted for 36.6 percent of Korea’s GDP last year, higher than Germany’s 35.7 percent and Japan’s 17.4 percent, according to the Korea International Trade Association.

“Korea depends on the United States and China for 40 percent of its total exports, which makes it more exposed to trade wars than other countries,” said Seok Byung-hoon, an economics professor at Ewha Womans University.

Vehicles for export are parked at the car-only pier at Pyeongtaek Port in Pyeongtaek, Gyeonggi, on April 29. [NEWS1]

Domestic demand shows little sign of recovery.

Korea’s domestic demand slump continues to drag on. The retail sales index recorded negative growth for 11 consecutive quarters from the second quarter of 2022 to the fourth quarter of last year.

In the first quarter of this year, growth hit zero, breaking the streak, but analysts say it was driven by base effects rather than a genuine uptick.

Structural issues, including a shrinking working-age population, stagnant investment and household debt continue to undermine domestic consumption.

Korea’s aging society is narrowing its key consumer base, while political uncertainty and a lack of inbound investment weigh on capital spending.

“Structural factors like weak investment, high household debt, demographic shifts and overseas consumption are dragging down domestic demand,” said Cho Young-moo, a research fellow at the LG Business Research. “This isn’t a situation that a simple interest rate cut can fix, as it might have in the past.

“The incoming administration must take up the challenge of economic recovery and use fiscal policy to lay the groundwork for long-term domestic growth, including strategies to stimulate investment.”

Translated from the JoongAng Ilbo using generative AI and edited by Korea JoongAng Daily staff.
BY JEONG JIN-HO [[email protected]]