South Korea's Economic Growth Forecast Slashed to 0.8% by KDI

The Korea Development Institute (KDI), a state-run think tank, has dramatically revised its forecast for South Korea's GDP growth rate down to 0.8% for this year, a significant drop from the 1.6% projected just three months earlier in February. This marks the first time a domestic institution has projected such a low growth rate, echoing previous gloomy forecasts from overseas investment banks.

Challenges Facing the Korean Economy

The KDI attributes this downward revision to a slump in the construction industry and worsening trade conditions. A 4.2% decrease in construction investment and a 0.4% reduction in goods exports (by volume) are cited as key factors. If the forecast holds, this would represent the worst economic performance in five years, since the 0.7% contraction in 2020 during the COVID-19 pandemic.

External and Domestic Shocks

Jung Kyu-chul, director of the Economic Outlook Division at KDI, highlighted the impact of external shocks such as tariffs, estimated at about 0.5 percentage points, and domestic shocks accounting for 0.3 percentage points. The uncertainty surrounding U.S. tariff policies and their negative effects on exports and domestic demand were particularly emphasized.

Additional Risk Factors

Concerns were also raised about the potential end of mutual tariff suspensions and the imposition of high tariffs on electronic products, South Korea's main export items, which could exacerbate the export slump. Domestically, the sharp decline in the construction market, with increasing unsold housing units and falling sale prices, poses significant risks.

Policy Recommendations

Despite the bleak outlook, the KDI advised caution regarding additional fiscal spending, such as a second supplementary budget, due to limited room for expansionary fiscal policy. Instead, a more accommodative monetary policy, including potential additional interest rate cuts by the Bank of Korea, was recommended to stimulate the economy.