KDI lowers Korea's economic growth outlook for next year to 2%

Containers are stacked and ready to be shipped at Busan Port, Nov. 1. Yonhap

A major state-run think tank in Korea slashed its 2025 economic growth outlook for the country to 2 percent Tuesday, citing an anticipated slowdown in exports, despite improvements in domestic demand.

The figure, presented by the Korea Development Institute (KDI), marks a 0.1 percentage point cut from the previous estimate of 2.1 percent made in August.

"In 2025, our economy is expected to grow at a rate of 2 percent, down from 2.2 percent in 2024, as domestic demand gradually improves but export growth slows," the KDI said.

For 2024, the KDI also lowered its economic growth forecast to 2.2 percent from 2.5 percent projected three months earlier.

"Domestic demand recovery is slower than expected," Jeong Gyu-cheol, a senior researcher at the KDI, said at a press briefing. "The 0.3 percentage point downgrade is entirely due to domestic factors."

The KDI forecasts that private consumption will grow 1.8 percent on-year in 2025, up from the projected 1.3 percent increase this year, supported by lower interest rates.

Facility investment is expected to rise 2.1 percent next year, marking an increase from 1.6 percent in 2024, on the back of an upturn in the semiconductor industry and lower interest rates.

The Bank of Korea slashed its key rate by a quarter percentage point in October in what many believed to be the first of a series of rate reductions. The Korean central bank had kept the policy rate frozen at 3.5 percent, the highest in about 16 years, since January 2023 after delivering a series of rate hikes from August 2021.

The KDI, however, lowered its export growth forecast for 2025 to 2.1 percent, a significant drop from the 7 percent on-year growth projected for 2024, due to ongoing uncertainties in the global trade market.

"If there is a sharp shift in U.S. trade policy, leading to a contraction in global trade, it could have a considerable negative impact on Korean exports," the KDI noted.

Then-Republican Presidential Candidate Donald J. Trump addresses supporters at the Election Night watch party at West Palm Beach Convention Center in West Palm Beach, Fla., Nov. 6. EPA-Yonhap

U.S. President-elect Donald Trump emphasized an "America First" approach during his campaign, which poses potential challenges for Korea's trade-dependent economy if the incoming U.S. administration moves forward with Trump-advocated broad tariffs on foreign-made goods entering the U.S.

The KDI added that its projections assume the tariffs would not materialize immediately under Trump's second term that begins in January.

"Given the time lag observed in the first Trump administration, we anticipate that any tariff increases would not take effect until 2026," Jeong said.

Jeong said if tariff hikes are implemented sooner than expected, it would be challenging to achieve the 2025 export growth forecast of 2.1 percent.

Consumer prices, a key gauge of inflation, are expected to rise 1.6 percent on-year in 2025, down from 2.3 percent in 2024, reflecting falling oil prices, the think tank said.

This forecast rate is below the target inflation rate of 2 percent.

For 2025, the KDI projects the average import price of Dubai crude, Korea's benchmark, to reach around $74 per barrel, as oil demand from China softens.

In terms of employment, the KDI estimates that the number of employed people will increase by 140,000 on-year in 2025, a notable decrease from the 180,000 on-year growth seen this year, as the effect of a declining working-age population becomes more pronounced.

The International Monetary Fund (IMF) recently commented on the resilience of the global economy during the disinflationary period, projecting global growth to hold steady at 3.2 percent in 2025, unchanged from the forecast for 2024.

The IMF also maintained its growth forecast for Korea at 2.2 percent for 2025. (Yonhap)