Think tank warns prolonged political unrest and worsening trade conditions could further drag down growth
State-run Korea Development Institute on Tuesday slashed South Korea's 2025 growth forecast to 1.6 percent, the lowest projection by a local institution so far, underscoring concerns over the country's weakening growth momentum.
The revised outlook marks a 0.4 percentage point downgrade from its November forecast of 2 percent. It falls below the Bank of Korea's 1.9 percent projection and the government's 1.8 percent estimate, aligning with the central bank’s signal in January that it may lower its forecast by around 0.2 percentage point.
Political uncertainty and a deteriorating trade environment were cited as key factors behind the revision. In particular, shifts in US policy following the inauguration of President Donald Trump were identified as the main driver.
"Policies under Trump took a different direction than we anticipated. In November, we expected tariff hikes to be implemented gradually, with no swift action this year, but tariffs have already been raised on some countries like China," said Jung Kyu-chul, director of KDI's office of macroeconomic analysis and forecasting, during a briefing on Tuesday.
As a result, KDI projected exports to grow by just 1.8 percent, a sharp decline from 6.9 percent last year. With a revised outlook for global semiconductor trade, the forecast for merchandise export growth was lowered from 1.9 percent to 1.5 percent.
KDI anticipates consumer sentiment, weakened by ongoing political turmoil following the Dec. 3 martial law declaration, to improve starting in the second quarter. As a result, private consumption growth is forecast to rise to 1.6 percent this year, up from 1.1 percent last year, although revised down from 1.8 percent in November, before the political unrest unfolded.
The consumer price inflation projection was retained at 1.6 percent.
KDI expects the Korean economy to contract in the first half before rebounding later in the year, forecasting gross domestic product growth of 0.9 percent in the first half and 2.2 percent in the second, bringing the full-year average to 1.6 percent.
However, the institute warned that the reality could be worse than projected, suggesting a further downgrade from the 1.6 percent forecast if current risks escalate.
"Uncertainty over changes in US trade policy could reduce both domestic and external investment demand, putting downward pressure on exports. ... Domestically, prolonged political instability may delay the recovery of economic sentiment, restricting improvements in domestic demand," it said in the report.
jwc@heraldcorp.com
