South Korea sees economy performing weakest since pandemic shock

South Korea projected sluggish growth this year that would mark the slowest pace since the pandemic-induced contraction of 2020, as U.S. tariffs are likely to upend commerce in the months ahead. The government projected the export-reliant economy will grow 0.9% in 2025, a forecast that’s slightly above the 0.8% estimate issued by the Bank of Korea in May. Export challenges Exports remained mostly resilient in the first half as Korean manufacturers front-loaded shipments ahead of higher U.S. tariffs, according to a joint government statement Friday. However, exports may weaken now that a trade deal with Washington was reached late last month, the statement said. Statistics for the first 20 days of August showed exports to the U.S. fell 2.7%, indicating a loss of momentum after they rose 1.4% in the full month of July. The forecast underscores the fragile state of Asia’s fourth-largest economy as it slowly recovers from one of its worst political crises, triggered by former President Yoon Suk Yeol’s failed attempt to impose martial law. As a key player in semiconductors, autos, and advanced technologies, South Korea’s growth will ripple across global supply chains, offering a leading indicator for global growth. Policy outlook Authorities continue to monitor economic trends with a view to adding stimulus as needed. Economists have mixed views as to whether the BOK will lower its benchmark rate when it next sets policy on August 28, but Governor Rhee Chang Yong said after last month’s meeting that four members of the board were open to another cut in coming months. The parliament and cabinet approved a 31.8 trillion won ($23.3 billion) extra budget last month as new President Lee Jae Myung sought to insulate the economy from trade headwinds, and the government said this week it will roll out a support package worth 45.8 trillion won to bolster supply chain resilience. South Korea remains heavily reliant on exports, raising risks as it confronts rising protectionism abroad. It also faces structural challenges at home, including weak construction activity and elevated household debt. “Our main goal under the current administration is to lift the potential growth rate,” Yoon Indae, deputy finance minister, said in a briefing. “There is no room to retreat.” The economy rebounded in the three months through June after a modest contraction in the previous quarter. But to reach 0.9% growth for the year, output would need to expand by roughly the mid-1% range in the second half, a goal the ministry conceded will be difficult to achieve. Separately, the administration seeks to win inclusion in MSCI Inc’s developed markets index within Lee’s term by improving foreign exchange and capital markets, with a detailed road map to be unveiled by year-end by a cross-agency task force. Market indicators Employment is forecast to rise by 170,000 this year, with gains in services offsetting losses in construction and manufacturing. Inflation is seen hovering near the central bank’s 2% target as energy prices decline, though the government warned that geopolitical tensions and erratic weather could reignite price pressures. The current account surplus is expected to reach $95 billion this year, compared with an earlier projection of $80 billion, due to reduced import costs from cheaper oil, before narrowing again to $80 billion in 2026. Consumer spending is forecast to grow 1.3% this year, supported by extra budget measures and rate cuts, though high household debt remains a drag. Further out, Lee’s administration has unveiled a 210 trillion won fiscal plan for 2026-30, aimed at advancing his core policy pledges across innovation, economic growth, social welfare, and foreign policy. A central focus of the plan is major investment in artificial intelligence, alongside priority funding for biotechnology, healthcare, and defense. The initiative is designed to raise South Korea’s potential growth rate to 3% over the period. By Heesu Lee

Sectors

Insights

Company

South Korea sees economy performing weakest since pandemic shock