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Political instability and tariff turmoil drag down Korea’s economic forecast

입력 2025.05.15 17:58

Park Sang-young
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A sign advertising commercial space for lease is posted on a building in Seoul on May 14. Korea’s domestic demand continues to stagnate as consumer sentiment remains frozen following the illegal martial law declaration on December 3 last year. Yonhap News

Recently, both domestic and international economic forecasting institutions have been predicting that Korea’s economic growth rate this year will fall below 1 percent. On May 14, the Korea Development Institute (KDI) projected the country’s growth rate at 0.8 percent. The Bank of Korea (BOK) is also expected to sharply lower its current forecast of 1.5 percent when it releases its revised economic outlook on the 29th.

According to the Korea Center for International Finance (KCIF), the average growth rate forecast for Korea among eight major global investment banks stood at just 0.8 percent as of the end of last month. This is down 0.6 percentage points in a month from an average of 1.4 percent at the end of March. Individual forecasts include JP Morgan at 0.5 percent, Citi at 0.6 percent, HSBC at 0.7 percent, and Goldman Sachs at 0.7 percent.

The unusually sharp downward revisions are attributed largely to the unpredictable tariff policies of the Trump administration in the U.S. An official from Korea’s Ministry of Economy and Finance said, “Trump’s tariff policies change rapidly, making it virtually impossible to accurately predict their impact on the Korean economy.” The KDI also said, “It was difficult to foresee such developments before April,” and added that “There are considerable difficulties in preparing neutral, optimistic, and pessimistic scenarios.”

Korea, which is heavily reliant on external trade, is particularly vulnerable to Trump's rhetoric. According to the International Monetary Fund’s (IMF) World Economic Outlook released on April 22, Korea’s forecast adjustment of 1.0 percentage point was the fourth-largest among the 30 major countries surveyed, following Iran (2.8 percentage points), Mexico (1.7 percentage points), and others.

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Domestic political uncertainty has also contributed to the downward pressure on growth. At the beginning of the year, many institutions had expected domestic demand to gradually recover. However, consumer sentiment has cooled significantly in the wake of the illegal martial law declaration on December 3 last year, prolonging the slump in domestic consumption more than expected. Korea’s first-quarter growth rate fell by 0.2 percent compared to the previous quarter, the lowest among the 19 countries that have released their Q1 growth rates so far this year.

However, if Korea and the U.S. reach an agreement to lower tariffs further in ongoing negotiations, there is potential for growth forecasts to be revised upward. In addition, the recent 90-day trade truce between the U.S. and China, along with the likelihood that Korea’s new government will implement expansionary fiscal policies, may act as positive factors for the Korean economy. Jung Kyu-chul, director of economic forecasting at the KDI, said, “If reciprocal tariff waivers are lifted or high tariffs are imposed on key export items such as electronics, export performance is likely to suffer. However, if negotiations are resolved smoothly, export conditions could improve rapidly.”

※This article has undergone review by a professional translator after being translated by an AI translation tool.