[New Government Growth Strategy] 30 Trillion Won Spent... Lee Administration Officially Forecasts 0% Growth for This Year

The Lee Jaemyung administration has set this year's economic growth forecast at 0.9%. The impact of tariffs imposed by Trump and the deepening slump in the construction sector are putting comprehensive pressure on the economy, leading to the expectation that growth in the 0% range is inevitable. Although the government injected more than 30 trillion won in fiscal stimulus through two supplementary budgets this year, the effect on boosting growth was limited. While lowering its first-year growth target to the 0% range, the administration aims to secure new growth engines centered on artificial intelligence (AI) investment, with the goal of achieving a 3% potential growth rate during its term.

Koo Yoonchul, Deputy Prime Minister for Economic Affairs and Minister of Strategy and Finance, is answering questions from the press at a joint briefing of related ministries on the new government’s economic growth strategy held at the Government Seoul Office in Jongno-gu, Seoul, on the 22nd. The briefing was attended by Bae Kyunghun, Minister of Science and ICT, Song Miryung, Minister of Agriculture, Food and Rural Affairs, Han Seongsuk, Minister of SMEs and Startups, and Moon Sinhak, 1st Vice Minister of Trade, Industry and Energy. 2025.8.22 Photo by Jo Yongjun

Growth Forecast for This Year Lowered from 1.8% to 0.9% Construction Investment -8.2%, Exports Drop to 0% Range 31.8 Trillion Won in Supplementary Budgets Still Result in Zero Growth Semiconductor 100% Tariff Not Reflected

In the "New Government Economic Growth Strategy" announced on the 22nd, the government forecasted this year's real gross domestic product (GDP) growth rate at 0.9%. This is half the 1.8% forecast at the beginning of the year, but slightly more optimistic than the 0.8% projections released earlier by the Bank of Korea and the Korea Development Institute (KDI). Government growth forecasts are generally viewed as targets reflecting policy intent, so the numbers are often more hopeful than those of other institutions. With first-half growth remaining in the low 0% range year-on-year, the government would need to raise second-half growth to the mid-1% range to achieve an annual growth rate of 0.9%.

However, warning signs are emerging across various economic indicators, including exports, investment, and consumption. The government expects construction investment, which saw negative growth of -3.3% last year, to plummet further to -8.2% this year. The decline in orders and project starts is expected to exacerbate the construction sector downturn, which is a key driver of sluggish domestic demand. Construction investment's contribution to GDP growth remained negative for five consecutive quarters through the second quarter of this year. Leading indicators for the construction sector are also worsening: construction orders in the second quarter dropped 8.4% year-on-year, and construction completions plunged 21.2%. Facility investment, which grew only 1.7% last year, is expected to improve marginally to 2.0% this year, limited by weak demand for advanced semiconductor process transitions and deteriorating external conditions.

On the 21st, Rep. Hyeongdu Choi of the People Power Party conducted a filibuster when the partial amendment bill of the Korea Educational Broadcasting System Act (EBS Act) was submitted at the National Assembly plenary session. 2025.8.21 Photo by Hyunmin Kim

Exports, which grew by 8.1% last year, are expected to increase by only 0.2% this year, posing a significant drag on the Korean economy. Last year, Korea's export volume rose 8.1% to a record high of $683.8 billion, but adverse factors such as reciprocal and item-specific tariffs imposed by the United States are hindering further export growth. Imports are also expected to decline by 0.6% this year, following a 1.7% decrease last year, mainly due to falling international oil prices and reduced energy imports. The current forecast does not reflect the 100% semiconductor item tariff mentioned by the U.S. If tariffs rise to 200-300%, as recently discussed, or if trade tensions between the U.S. and China intensify, growth could fall even further.

Thanks to improved consumer sentiment from supplementary budgets and interest rate cuts, private consumption is expected to grow by 1.3% this year, slightly better than last year's 1.1%, but the low 1% growth trend is likely to persist. In the second half, recovery may be bolstered by supplementary budgets and previous interest rate cuts, but the lingering effects of high inflation and household debt burdens remain significant constraints, and some expect the impact of the supplementary budgets to be only temporary.

Consumer prices are forecast to rise by 2.0% this year. This is 0.3 percentage points lower than last year's 2.3%, but slightly higher than the 1.8% forecast at the beginning of the year. Kim Jaehoon, Director General for Economic Policy at the Ministry of Economy and Finance, explained, "We raised our inflation forecast compared to the beginning of the year because inflation in the first half turned out to be slightly higher than expected. However, inflation is fluctuating around the government's 2% target, and there is no need to worry about inflation at this point."

The current account surplus is projected at $95 billion, down from last year's $99 billion, indicating that the government expects major economic indicators to decline. Despite sluggish conditions in manufacturing and construction, the number of employed persons is expected to increase from 160,000 last year to 170,000 this year, mainly driven by growth in the service sector such as healthcare and welfare.

If these forecasts hold, this will be the first year that Korea's growth rate falls into the 0% range outside of major crises such as the foreign exchange crisis in 1998 (-5.1%), the global financial crisis in 2009 (0.8%), and the pandemic in 2020 (-0.7%). The government forecasts that after recording 0% growth this year, the Korean economy will grow by 1.8% next year.

Potential Growth Rate Collapses, Aiming for a Rebound to 3% AI and Ultra-Innovation at the Forefront, but No Sign of Structural Reform

The Lee Jaemyung administration plans to focus on fostering new industries such as artificial intelligence (AI) to achieve a 3% potential growth rate during its term. In the face of structural crises caused by low birth rates and an aging population, the government intends to reverse the downward trend in potential growth by selectively investing in strategic industries to increase capital input and productivity.

The potential growth rate is the maximum growth rate that can be achieved by mobilizing all production factors, such as capital, without triggering inflation. By emphasizing potential growth rather than the actual growth rate, the Lee administration is signaling its intent to strengthen the fundamental capacity of the economy. Previous administrations also sought to boost potential growth through productivity improvements, but focused mainly on short-term measures and failed to achieve visible results. This year, two supplementary budgets totaling 31.8 trillion won were implemented, but they only managed to raise the growth rate by 0.1 percentage points.

Experts point out that raising the potential growth rate will require not only investment in AI but also simultaneous, long-term structural reforms to break the entrenched low-growth pattern. Kang Seongjin, professor of economics at Korea University, said, "AI is merely a means to growth, not an independent industry in itself. While the direction of technology-driven growth is correct, discussions on structural reform in key areas such as labor, education, and pensions-which are fundamental to boosting growth-should come first."