Economic Outlook KDI Economic Outlook 2024-2nd Half November 12, 2024
The Korean economy is projected to grow by 2.0% in 2025, decelerating from 2024 (2.2%), as the slowdown in domestic demand moderates while export growth declines.
- Consumer price inflation is expected to register at 1.6%, down from 2024 (2.3%) and remaining below the target level due to subdued demand pressures and falling international oil prices.
- Employment is projected to expand by 140,000, a decrease from the 180,000 increase in 2024, as the recovery in domestic demand remains moderate and the impact of a shrinking working-age population continues to spread.
- Private consumption is projected to rise by 1.8%, up from 1.3% in 2024, supported by interest rate cuts and improvements in exports.
- Equipment investment is expected to grow by 2.1%, an increase from 1.6% in 2024, driven by interest rate cuts and continued favorable momentum in the semiconductor market.
- Construction investment is projected to decline by 0.7%, from -1.8% in 2024, due to a cumulative decline in construction orders received.
- Exports are projected to increase by 2.1%, moderating from high growth of 7.0% in 2024, as global investment becomes subdued amid heightened trade uncertainties.
- Current account surplus is expected to expand, primarily due to improved terms of trade (i.e., export prices relative to import prices), despite the slowdown in export growth and a recovery in domestic
Ⅰ. Current Economic Conditions
- □ The Korean economy is exhibiting signs of a subdued improvement as the deceleration in construction investment deepens.
- · GDP grew only by 1.5% year-on-year in the third quarter, marking a marginal 0.1% increase quarter-on-quarter on a seasonally adjusted basis.
- · By sector, growth in manufacturing has decelerated, and the contraction in construction has widened significantly.
- □ While private consumption remained subdued and construction investment weakened further, equipment investment showed a slight improvement.
- · Private consumption experienced mild growth, driven primarily by goods consumption; however, private consumption conditions partially recovered due to declines in market interest rates and expanded real wage growth.
- · The value of construction completed dropped sharply, especially within the building construction sector, largely due to prolonged underperformance in orders received. Meanwhile, equipment investment improved modestly, bolstered by a temporary surge in transport equipment and expanded investment related to semiconductors.
- □ Exports sustained favorable momentum, primarily driven by semiconductors, despite some adjustments in automobiles and petroleum products.
- · Korea’s exports showed robust growth, centered on semiconductors, as the global trade value of semiconductors remained high and the decline in global trade volume eased.
- · External stability remained sound, with the continued large current account surplus and net external assets rising to nearly 50% of GDP.
- □ With domestic demand displaying weak momentum, inflationary pressures eased, and employment conditions underwent moderate adjustment.
- □ The global economy is expected to maintain moderate growth in 2025, following the trend in 2024, although risks are increasing, including economic instability in China and worsening global trade conditions.
- · The IMF recently forecasted global economic growth at 3.2% in 2025, consistent with 2024, as growth slows in the US and China, while economic slowdown in the Eurozone and Japan shows signs of moderation.
- · The global trade value of semiconductors is expected to continue high growth in 2025, although at a slower pace compared to 2024.
- · Prospects of further economic weakening in China emerge, driven by ongoing setbacks in the real estate market.
- · Amid heightened uncertainty regarding the scope and pace of policy implementation from Trump’s campaign pledges, trade disputes are likely to intensify, potentially exerting considerable pressure on the global economy.
- □ Given current domestic and international economic conditions, the Korean economy is anticipated to grow at levels aligned with its potential growth rate, as domestic demand partially recovers and export growth moderates.
- · Supported by the gradual effects of interest rate cuts and improved exports, private consumption and equipment investment are expected to experience a moderate recovery.
- · In contrast, construction investment is projected to decline, posing a significant constraint on economic recovery due to the cumulative impact of weakened orders received.
- · Exports are expected to register eased growth due to challenging global trade conditions, with significant external risks remaining.
- · Consequently, the Korean economy is projected to grow by 2.0% in 2025, close to its potential growth rate.
- □ Given these economic conditions, a gradual normalization of macroeconomic policies is required.
- · The base rate should be lowered progressively, considering that the inflation rate has fallen below the target.
- · Fiscal policy should focus on long-term fiscal prudence at a level that does not significantly hinder economic growth, given the persistently high deficit in the operational fiscal balance.
- □ Efforts to strengthen economic dynamism through structural reforms are essential and should be sustained.
- · As Korea’s potential growth rate is projected to decline to the mid- to upper 1% range for 2025–2030, growth in private consumption—which directly impacts public welfare—is also anticipated to slow.
- · Necessary measures include encouraging the entry of innovative startups by reducing market entry barriers, establishing conditions for fair competition, and enhancing flexibility to facilitate smoother adaptation to the evolving economic environment.
Ⅱ. Domestic Economic Outlook for 2025
1. Major Assumptions on External Conditions
- □ The global economy is anticipated to sustain moderate growth in 2025, continuing the trend from 2024.
- · The IMF has recently forecasted global economic growth at 3.2% for 2025, consistent with the growth for 2024.
- · However, downside risks to the global economy remain elevated, including potential deterioration in trade conditions following Trump’s election.
- □ The import price of Dubai crude oil is assumed to average around $74 per barrel in 2025, down by 7.4% from 2024’s level of $80, reflecting a slowdown in oil demand, particularly from China.
- □ The Korean won, in terms of the real effective exchange rate, is assumed to remain stable, with no significant fluctuations from current levels.
2. Domestic Economic Outlook for 2025
- □ The Korean economy is forecast to grow by 2.0% in 2025, slightly below the 2.2% growth in 2024, as domestic demand weakness gradually eases but export growth moderates.
- · Private consumption is projected to rise by 1.8%, up from 1.3% in 2024, supported by interest rate cuts and improvements in exports.
- · Equipment investment is expected to grow by 2.1%, an increase from 1.6% in 2024, driven by interest rate cuts and continued favorable momentum in the semiconductor market.
- · Construction investment is projected to decline by 0.7%, from -1.8% in 2024, due to a cumulative decline in construction orders received.
- · Exports are projected to increase by 2.1%, moderating from high growth of 7.0% in 2024, as global investment becomes subdued amid heightened trade uncertainties.
- · The current account surplus is expected to expand, primarily due to improved terms of trade (i.e., export prices relative to import prices), despite the slowdown in export growth and a recovery in domestic
demand. - □ Consumer price inflation is projected to stand at 1.6%, down from 2.3% in 2024 and below the target, amid weak demand pressures and declining international oil prices.
- · Core inflation (excluding food and energy) is also expected to rise by 1.5%, lower than in 2024 (2.1%).
- □ Employment is projected to expand by 140,000, a decrease from the 180,000 increase in 2024, as the recovery in domestic demand remains moderate and the impact of a shrinking working-age population continues to spread.
- · The unemployment rate is expected to edge up slightly, from 2.7% in 2024 to 2.8% in 2025.
3. Risks to the Outlook
- □ With a heightened likelihood of a rapid deterioration in international trade conditions, the Korean economy faces considerable downside risks.
- ·A swift shift in U.S. trade policy that constrains global trade could impose significant negative pressures on Korea’s exports.
- ·Furthermore, Korea’s export growth may decelerate if China’s economy falters due to a prolonged real estate market slump and escalating tensions
with the U.S.
- □ Domestically, construction investment may remain weak if the financial deterioration among construction firms begins to spread to the real economy.
Ⅲ. Policy Recommendations
1. Fiscal Policy
- □ The 2025 budget proposal is considered appropriate under current economic conditions, as it seeks to uphold long-term fiscal soundness without placing excessive pressure on the economy in the short term.
- · Total revenue is projected to grow by 6.5% year-on-year, with tax revenue anticipated to expand due to improved corporate earnings following the export recovery in 2024.
- · By keeping total expenditure growth comparatively low at 3.2% through better expenditure efficiency, the proposal underscores a gradual reduction in the operational fiscal balance deficit (2.9% of GDP).
- · However, given that the projected total revenue growth rate of 6.5% includes a rebound from the exceptionally low growth rate of the previous year (-2.2%) and is thus not sustainable, the budget proposal cannot be interpreted as contractionary, despite setting the total expenditure growth rate (3.2%) lower than that of total revenue.
- □ The pace of expenditure growth should be carefully managed, as an excessive increase in government spending could dampen private sector spending by raising the national burden ratio.
- · Government consumption has been growing faster than Korea’s overall economic scale (GDP), which has consistently restricted the capacity for private consumption.
2. Monetary Policy
- □ It is recommended to gradually lower the base rate, considering the high probability that the slowdown in price increases will continue for the time being.
- · Since inflation stability is the primary objective of monetary policy, greater attention should be directed to recent trends indicating that core inflation—reflecting underlying price trends—has begun to fall below the 2% target.
- · Accordingly, a gradual normalization of the high-interest rate policy adopted in recent years to address elevated inflation is advisable.
- □ Meanwhile, for financial stability, it is essential to consider response measures in coordination with financial authorities, including enhancing macroprudential policies.
- · When price stability and financial stability objectives are at odds, it is preferable to employ both monetary and macroprudential policies in a balanced manner, as monetary policy alone may be insufficient to respond effectively.
3. Financial Policy
- □ Concerns over short-term systemic risk in Korea’s financial market are currently considered not substantial.
- · Systemic risks in the financial market appear manageable, as key financial soundness indicators exceed regulatory thresholds by more than double.
- · Although household debt in Korea is high by global standards, the household debt-to-GDP ratio has shown a gradual slowdown since 2022.
- □ However, to strengthen mid- to long-term financial system stability, liquidity support to struggling companies and financial institutions should be avoided, and evaluations of loan repayment capacity should be better rationalized to accurately reflect borrowers’ true repayment ability.
- · Government support for failing companies risks creating moral hazard, as it weakens the loan screening incentives of financial institutions and encourages excessive borrowing beyond repayment capacity.
- · Exceptions to the Debt Service Ratio (DSR) regulations, such as for jeonse loans and policy financing, should be narrowed to more accurately reflect borrowers’ repayment capacity in regulatory metrics.
- · Mid- to long-term financial system risks should be controlled through policies that ensure financial market soundness, thereby creating conditions that allow monetary policy to concentrate more effectively on price stability.
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