Korean economy continues to stagnate as construction slump offsets higher domestic spending

Workers operate at a construction site for an apartment complex in Seoul, Aug. 11. Yonhap

The slump in the construction industry is expected to drag Korea’s growth rate down to 0.9 percent this year, offsetting gains in domestic demand and a smaller-than-expected deceleration due to eased U.S. tariffs, industry officials said Sunday.

In its recently revised economic outlook, the government projected real gross domestic product (GDP) growth in 2025 at 0.9 percent, signaling the start of a prolonged low-growth era.

The downgrade was driven primarily by a bleak construction sector. Government projections show investment in the sector shrinking 8.2 percent in 2025, following a 3.3 percent decline last year, as the recovery remains sluggish.

In contrast, private consumption, a long-standing concern, has rebounded and is forecast to grow 1.3 percent this year, up 0.2 percentage points from 2024. It was supported by government-issued vouchers aimed at boosting household spending.

Export growth is forecast to decelerate to 0.2 percent this year from 8.1 percent in 2024 due to U.S. tariffs. Still, the government noted that uncertainty has eased significantly following a tariff agreement.

"Construction investment has been the main drag on growth over the past two years," Bank of Korea (BOK) Gov. Rhee Chang-yong said at a May 29 press meeting. "If it were simply flat at zero (rather than negative), this year’s growth rate would be around 1.7 percent."

The industry has been under pressure from a slump in project financing, soaring construction costs and tighter lending rules aimed at curbing household debt.

In 2024, for instance, the value of building construction fell 3.2 percent from a year earlier to 231 trillion won ($166.7 billion), according to Statistics Korea. That marked the steepest decline since 1999, when the effects of the Asian financial crisis were still being felt.

The outlook for 2025 remains grim as well. President Lee Jae Myung’s push to tighten workplace safety rules and his pro-labor stance are expected to weigh on business sentiment, industry officials said.

“While a range of policy measures to support the construction industry is expected, their impact may be limited due to timing constraints and the government’s focus on real estate market stability,” Heungkuk Securities analyst Kim Jin-seong said.

A rate cut by the BOK aimed at boosting the construction sector also appears unlikely. The central bank has signaled that premature easing could risk reigniting a "vicious cycle" of rising home prices, mounting household debt and weakening consumption.

"The current economic situation is extremely serious, and stimulus measures are urgently needed. However, we must break from past practices of encouraging excessive real estate investment as an easy way to support the economy," Rhee said in a speech marking the BOK's 75th anniversary on June 12.

All eyes are now on the central bank’s policy decision due Thursday, with analysts widely expecting it to keep rates on hold.

"The BOK will probably wait for clearer signs of moderation in housing prices before taking action," said Kang Min-joo, senior economist at ING, who expects a rate cut in October. "It may raise its 2025 GDP forecast from 0.8 percent year-on-year to 1 percent."