OECD Lowers South Korea's Economic Growth Forecast from 2.1% to 1.5%

South Korea Sees Third Largest Growth Forecast Drop After Mexico and Canada
Other Institutions Also Lower South Korea's Economic Outlook

The streets of Myeongdong, Jung-gu, Seoul, appear quiet. The photo is unrelated to the article content. Photo by Jo Yongjun

The Organisation for Economic Co-operation and Development (OECD) has lowered South Korea's economic growth forecast for this year by 0.6 percentage points from its initial projection.

On the 17th, the OECD released its "Interim Economic Outlook," forecasting that South Korea will grow by 1.5% this year. In December last year, the OECD had already revised South Korea's growth forecast down from 2.2% to 2.1%, and now it has cut it by another 0.6 percentage points within three months. The OECD explained that "South Korea's growth momentum will be maintained," but "it is expected to be more moderate than previously anticipated."

The downgrade in South Korea's growth outlook is interpreted as the combined effect of the aftermath of the December 3 emergency martial law and the intensifying U.S. tariff war. When the OECD released its previous forecast, these two factors had not been fully reflected. Political turmoil at home remained unresolved, while U.S. President Donald Trump's reciprocal tariff policies disrupted South Korea's growth.

In fact, South Korea's decline in growth forecast is the third largest after Mexico (-2.5 percentage points) and Canada (-1.3 percentage points). Excluding these two countries, which were strongly affected by the second Trump administration, South Korea experienced the largest drop in growth momentum among major countries. France, which also experienced political turmoil like South Korea, only lowered its growth forecast by 0.1 percentage points. India (-0.5 percentage points), Japan (-0.4 percentage points), the United Kingdom (-0.3 percentage points), and Germany (-0.3 percentage points) all had smaller declines than South Korea.

Other economic forecasting institutions have already significantly lowered South Korea's growth rate. The Korea Development Institute (KDI) lowered its growth forecast for this year from 2.0% to 1.6% last month. This was largely due to sluggish construction investment and a decline in consumer sentiment, which was previously expected to improve. The Bank of Korea also lowered its real GDP growth forecast from 1.9% to 1.5% in its revised economic outlook released on the 25th of last month, and the government expects economic growth to reach only 1.8% this year.

The International Monetary Fund (IMF) maintained South Korea's growth forecast at 2.0% as of the 7th of last month but assessed that uncertainties and downside risks to the Korean economy remain significant. In its "2024 Article IV Consultation Report on Korea," the IMF warned that "prolonged political uncertainty in South Korea could negatively affect investment and consumer sentiment and increase financial market volatility."

The growth forecast for South Korea in 2026 was raised slightly from 2.1% to 2.2%. Consumer price inflation forecasts were also revised upward by 0.1 percentage points to 1.9% for this year and 2.1% for 2026.

The OECD revised the global growth forecast for this year down from 3.3% to 3.1%, a 0.2 percentage point decrease. The growth forecast for next year was also lowered from 3.3% to 3.0%, a 0.3 percentage point cut. The OECD expects the global economic recovery to continue this year, supported by robust growth in large emerging markets including China, alongside the United States.

Among major countries, the U.S. growth forecast was lowered from 2.4% to 2.2% for this year, but strong private consumption is expected to sustain solid domestic growth. China's growth forecast was slightly raised from 4.7% to 4.8%, positively influenced by government incentives and rapid export growth supporting private consumption. The G20 growth forecast was lowered from 3.3% to 3.1%, and the Eurozone's forecast was cut from 1.3% to 1.0%.

The OECD cited expanding trade barriers and persistent inflation as downside risks to the economy. It pointed out the possibility of global economic fragmentation due to increased trade barriers and concerns over monetary policy constraints and financial market volatility caused by rising inflation. However, it also mentioned potential upside factors such as future tariff reduction agreements and resolution of geopolitical conflicts.