[2025 Economic Policy] Warning Signs in Both Exports and Construction... Government Lowers Next Year's Growth Rate to 1.8%

Government Lowers by 0.4% Points After 6 Months
All Indicators Including Exports and Construction Expected to Decline
40% of Public Welfare Projects Executed in Q1

Amid simultaneous sluggishness in exports and domestic demand and the added turmoil of the impeachment political crisis, the future of the South Korean economy is shrouded in uncertainty, leading the government to lower its economic growth forecast for this year to the 1% range. The record-high fiscal execution rate in the first half of this year and the 18 trillion won fiscal reinforcement are analyzed as desperate measures to respond to the shock of low growth in the 1% range.

In the '2025 Economic Policy Direction' announced on the 2nd, the government projected this year's real Gross Domestic Product (GDP) growth rate at 1.8%. This is a 0.4 percentage point decrease from the 2.2% forecast made in July last year, and even lower than the 1.9% forecast released by the Bank of Korea at the end of November last year. With the second Trump administration in the U.S. increasing export headwinds and limited domestic demand recovery, combined with martial law-induced political turmoil, the growth rate is expected to fall short of the potential growth rate. If this forecast holds, the economy will remain around 2% growth for three consecutive years, following 1.4% growth in 2023 and 2.1% last year.

The Ministry of Economy and Finance stated, "High levels of uncertainty will persist depending on developments such as changes in U.S. trade policy, interest rate paths of major countries, and geopolitical tensions," adding, "The expanded domestic and international uncertainties will significantly impact growth trajectories, financial and foreign exchange markets, and living conditions more than ever."

The government estimated that private consumption this year will improve to 1.8% from 1.2% last year due to easing high interest rates and inflation, but low growth in the 1% range will continue. Construction investment is also expected to decline by 1.3% following last year's 1.5% decrease, reflecting reduced orders and groundbreaking, indicating that the construction sector, which has been a pillar of the domestic economy, will remain in a contraction phase.

Exports, which grew 8.1% last year, are forecasted to increase by only 1.5% this year, potentially dragging down the South Korean economy. The increase in employed persons is also expected to shrink from 170,000 last year to 120,000 this year due to sluggish manufacturing and construction sectors, with the government analyzing that major economic indicators will show a downward trend.

This year's consumer price inflation rate is projected at 1.8%, lower than last year's 2.3%. This is because international oil prices (Dubai crude) are predicted to be around $73 per barrel, $7 lower than this year, and inflationary pressures from economic factors are expected to be limited.

However, uncertainties remain due to geopolitical risks, weather conditions causing volatility in raw material and agricultural product prices, and the elevated won-dollar exchange rate adversely affecting South Korea's trade conditions, posing significant risks of pushing prices higher, making the situation far from reassuring.

The current account surplus is expected to reach $80 billion. The surplus is predicted to shrink compared to last year's $90 billion due to the slowdown in export growth.

Domestic and international research institutions have already expressed views that it will be difficult for the South Korean economy to maintain a growth rate in the 2% range. The Bank of Korea recently lowered its growth forecast to 1.9% in its revised economic outlook and predicted that even this might be precarious due to the martial law aftermath.

The International Monetary Fund (IMF) Korea mission team lowered its growth forecast for South Korea this year from 2.2% to 2.0% in its annual consultation results, noting increased downside risks and a high possibility of falling into the 1% range. The Korea Development Institute (KDI) and the Asian Development Bank (ADB) also presented a 2.0% forecast, similar to the IMF. The Organisation for Economic Co-operation and Development (OECD) forecasted 2.1%, which is also 0.1 percentage points lower than before.

Experts point out that since variables such as martial law and the impeachment political crisis were not considered in these forecasts, the government's stated growth rate target of 1.8% may also be an unachievable goal.

The government plans to pour available resources into the first quarter, viewing it as the period that will determine the annual growth rate. To this end, it decided to raise the central fiscal execution target for the first half of the year to a record high of 67%. Approximately 85 trillion won worth of livelihood and economic projects will be executed at 70% in the first half and over 40% in the first quarter.

Kim Jae-hoon, Director of Economic Policy at the Ministry of Economy and Finance, said, "We will mobilize all available public sector resources worth 18 trillion won to support the economy," adding, "Considering the concretization of the Trump administration's policies and the livelihood economy situation, we will reassess overall economic conditions in the first quarter and, if necessary, devise additional measures to reinforce the economy."