The domestic real economy is showing weakness in exports, investment, and consumption, constraining economic growth. Exports have slipped due to price declines in semiconductors, automobiles, and petroleum products, as well as slack global demand and policy uncertainties in major economies. Semiconductors have been severely affected by falling unit prices, and overseas demand for South Korean autos has slowed. These conditions, in addition to the base effect of strong export performance in the previous year, conspired to produce a negative growth rate (-2.1 percent) in exports in the first half (H1) of 2025. This is the first time exports have actually fallen since the third quarter (Q3) of 2023.
Private consumption has slowed too across both goods and services, with the exception of consumption of some durable goods, such as automobiles. Domestic political uncertainties, an inflationary environment, and high interest rates have all worked to dampen consumer sentiment, resulting in overall sluggish domestic demand. Facility investments have also tumbled, especially investments in chip manufacturing equipment. Construction investment continued its freefall, recording its fourth consecutive quarterly decline.
At the same time, industrial production has shown some signs of recovery. After significant volatility in H2 of last year, manufacturing production began to tick back upward starting in February 2025. Service sector output has also climbed, albeit modestly, since the beginning of this year.
However, key indicators used to assess economic conditions remain unstable. The cyclical component of the leading index temporarily rebounded after February 2025 but has recently reverted to a downward trend. Also, the cyclical component of coincident index continues to decline with no clear signs of a rebound since last year. Despite a modest recovery in production, continued contractions in exports, consumption, and investment, along with heightened uncertainty in key economic sectors, are expected to significantly hamper domestic growth in the near term.
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Hello.
I’m Sung Wook HONG, Senior Research Fellow and Director of the Office of Economic Outlook at the Korea Institute for Industrial Economics and Trade.
I’d like to discuss the current economic conditions in South Korea and the world and the macroeconomic outlook for 2025.
Recently, Korea’s real economy has entered a downturn, driven by a decline in exports due to weak unit prices of major export items early in the year,
sluggish demand amid intensifying global uncertainties, and a reverse base effect from strong performance during the same period last year.
In addition, heightened domestic political uncertainty has dampened consumption and investment, resulting in sluggish performance across all sectors.
As the global economy enters a transitional phase driven by changes in US trade policy,
global economic growth in 2025 is expected to fall off from its 2024 performance.
Assuming an average annual oil price of around USD 67 per barrel and a 3.6% increase in the KRW/USD exchange rate compared to the previous year,
Korea’s economy is projected to grow by around 1% in 2025.
Domestic demand should tick up modestly, with private consumption increasing by 1.0%
and facility investment by 1.8%. Construction investment, on the other hand, is set to contract by 4.7%.
Exports and imports are forecast to decline by 1.9% and 2.1%, respectively.
Now, let’s take a look at a few graphs for more details.
First is the outlook for economic growth in 2025.
In 2025, Korea’s economy is expected to grow at around 1% year-over-year (YoY).
This weak figure owes to sluggish exports and lower trade volumes triggered by uncertainties surrounding US tariff policy.
Despite the launch of a new government and supplementary budget effects, recovery in domestic demand is projected to remain quite mild.
Domestically and globally, key variables will include the ripple effects of the US-China trade conflict,
uncertainties surrounding trade and monetary policy, and the potential for increased financial market volatility.
On the domestic front, additional variables include consumer and investment sentiment,
and the extent of any decline in exports due to worsening trade conditions.
An easing of US-China trade tensions and a more favorable trade environment might prompt an upward adjustment to Korea’s economic prospects this year.
Also, the launch of the new administration and its economic stimulus policies could have a positive impact on the Korean economy.
Next up is the outlook for private consumption.
Overall, private consumption is expected to grow by around 1.0% compared to the previous year,
aided by the launch of a new government and easing political uncertainties,
likely interest rate cuts, and expectations for economic stimulus from the new administration.
But overall consumption growth will be capped due to persistently high levels of household debt,
rising perceived inflation, and only a modest recovery in consumer sentiment.
Next up is the outlook for investment.
Despite rising prices of imported capital goods and heightened uncertainty in major countries’ trade policies dampening investment sentiment,
overall facility investment should actually increase by about 1.8% YoY supported by continued strength in the semiconductor industry driven by robust demand for high-value memory chips.
Construction investment, however, is expected to tumble by 4.7% compared to the previous year,
as leading indicators for the construction market remain weak,
with growing unsold housing inventories and sluggish trends in permitting and groundbreaking.
Finally, let’s take a look at the outlook for exports and imports.
Exports in 2025 are expected to decline by 1.9% YoY.
Although exports of AI-related semiconductors, ICT devices, shipbuilding, and biotech products should remain strong,
the continued US-China trade conflict, uncertain U.S. tariff policy under the Trump administration,
and a global trade contraction are likely to weigh on overall exports.
Imports are also expected to decline by about 2.1% compared to the previous year despite a weaker won,
as oil prices fall and demand for intermediate goods contracts amid a sluggish export environment.
Overall, the balance of payments for 2025 is projected to sit at USD 52.4 billion, a slight increase over 2024.
[REPORT]
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