Below the Recent 10-Year Average of 2.5%
High Inflation, High Interest Rates, and Tariff Risks Weigh on Growth
Exports Stagnant as Automobiles, Steel, and Machinery Underperform
The Korea Economic Research Institute (KERI) has forecast this year's economic growth rate at 1.0%. This figure is the lowest since the COVID-19 pandemic and falls short of the recent 10-year average of 2.5%.
On June 22, KERI released its report, "KERI Economic Trends and Outlook: First Half of 2025," projecting that the Korean economy will experience a "low in the first half, high in the second half" pattern and grow by 1.0% this year. KERI analyzed that, due to uncertainties in U.S.-driven trade policies, the growth rate in the first half of the year will remain at just 0.2%. In the second half, as the effects of policy responses to domestic and external economic risks become visible, the growth rate is expected to rebound to 1.8%.
KERI identified prolonged high inflation and high interest rate stress, real estate project finance (PF) insolvency, and U.S.-driven tariff risks as the main factors constraining economic recovery. The institute also analyzed that upcoming government stimulus measures and trade diplomacy with the U.S. will be key factors determining the extent of Korea's economic rebound.
Lee Seungseok, a senior research fellow at KERI, stated, "Due to rapid changes in tariff policy under the Trump administration, economic momentum was dampened in the first half of the year." He added, "In the second half, a gradual recovery is expected as exports of key products recover and the effects of policy responses become visible." Lee also emphasized, "The specific content and speed of government stimulus measures, as well as the results of Korea-U.S. trade negotiations, will be decisive variables determining the extent of the economic rebound."
Private consumption, which accounts for the largest share of domestic demand, is expected to increase by only 1.2% this year. KERI analyzed that the slowdown in wage growth due to poor corporate performance and the burden of household debt principal and interest repayments are limiting consumption capacity, while growing concerns over economic contraction have significantly dampened consumer sentiment.
Facility investment is projected to grow by 2.1% this year, supported in part by demand for semiconductor and AI (artificial intelligence) infrastructure-related equipment and transportation equipment such as ships. However, KERI identified the slowdown in global demand and the deterioration of investment sentiment due to heightened external uncertainties as factors constraining improvements in facility investment.
Due to the prolonged stagnation in real estate PF insolvency and contraction in public sector orders, construction investment is expected to contract by 3.8% this year. In particular, KERI analyzed that new construction starts have sharply declined due to worsening liquidity related to PF and delays in restructuring centered on small and medium-sized construction companies, resulting in the construction sector recording its lowest performance in the past 10 years and a significant weakening of recovery momentum.
The consumer price inflation rate is expected to slow to around 1.9% annually, as demand-side inflationary pressures weaken due to sluggish domestic demand. KERI noted that while upward pressure on import prices due to increased volatility in the won-dollar exchange rate still exists, its impact is expected to be limited compared to previous years.
Exports, which have supported growth thus far, are expected to remain virtually flat this year. Weakness in key sectors such as automobiles, steel, and machinery?excluding semiconductors?as well as the U.S.'s high-tariff policies, are expected to act as burdens. In particular, as tariffs of 25% to 50% have been imposed on automobiles and steel, which have a high export dependence on the U.S. market, export conditions have significantly worsened. Accordingly, KERI predicted that this year's current account surplus will be limited to $89 billion, a decrease of $10 billion from the previous year.
KERI analyzed that sluggish domestic demand is being sustained by internal factors such as the prolonged real estate PF insolvency, weakened consumer sentiment, and the accumulated shocks of high inflation and high interest rates. In addition, due to high U.S. tariffs and intensifying U.S.-China trade conflicts, exports of most major items excluding semiconductors are expected to remain weak. KERI also identified delayed completion of monetary tightening by major countries and the expansion of geopolitical risks as factors increasing downward pressure on the economy.
Lee Seungseok, senior research fellow, emphasized, "If we miss the golden time for an economic rebound, entering a recovery phase itself could be delayed," and added, "The government's ability to implement stimulus measures and the results of Korea-U.S. trade negotiations will determine the future trajectory of the economy."
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