South Korea is navigating uncertain economic waters as its foremost think tank, the Korea Development Institute (KDI), has readjusted the nation’s growth forecast, lowering expectations for the second time in just four months. This revised outlook signals potential economic volatility influenced by U.S. tariff policies under President Donald Trump as well as internal political challenges.
Initially, KDI had anticipated a more robust economic performance. However, it has now revised its growth projection to a modest 1.6% for 2025, marking a decline of 0.4 percentage points from its earlier prediction. Kim Jiyeon, a seasoned economist at KDI, pinpointed the deterioration of the trade environment as a pivotal influence driving this adjustment. The challenges are compounded by the domestic political instability following the impeachment and legal troubles of President Yoon Suk Yeol, which surfaced after an unexpected imposition of martial law late last year.
The external pressures from trade tensions are exacerbated by lackluster domestic demand. Consumer spending has slowed, and the labor market is experiencing a downturn, contributing further to economic uncertainties. Jung Kyuchul, Head of KDI’s macroeconomic analysis department, noted a slowing pace in exports across most industrial sectors, with semiconductors being a notable exception. This situation casts a shadow of concern over the broader economic outlook.
KDI foresees potential further downward revisions if heightened trade tensions persist or if political instability lingers. In November, we assumed a gradual application of President Trump's tariffs. However, the pace and scale of these tariffs have surpassed our expectations, thereby escalating further uncertainties, Jung explained during a recent briefing.
The latest tariff measures announced by President Trump, including a 25% tariff on all foreign steel and aluminum, complicate the trade landscape. Though the immediate impact on South Korea may be limited, given these goods constitute less than 1% of its exports to the U.S., the possible extension of tariffs to include automobiles, semiconductors, and pharmaceuticals could have significant repercussions. South Korea’s economy heavily relies on its robust semiconductor exports, and any disruption here could profoundly affect its economic trajectory.
Despite potential challenges stemming from international trade adjustments, Jung remains cautiously optimistic, noting that collaboration and negotiation could moderate these impacts. Since our semiconductor exports are substantial, the economic impact would be considerable if that sector takes a hit, he emphasized.
As South Korea braces for economic adjustments, it becomes imperative to navigate both internal and external challenges strategically, ensuring resilient growth despite adversities. The evolving international trade dynamics necessitate vigilant monitoring and adaptive strategies to safeguard South Korea's economic future.
