KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

Monthly Economic Trends KDI Monthly Economic Trends 2025. 5

■	The Korean economy is showing signs of a slowdown, as external conditions have sharply deteriorated.

	○	A weakened construction sector is weighing on the recovery of domestic demand, while deteriorating trade conditions are slowing exports.

	-	Manufacturing production remains on a favorable trajectory, led by semiconductors, accompanied by a significant increase in related investment.

	-	However, the protracted downturn in construction is keeping overall production and domestic demand growth at low levels.

	-	Average daily exports declined, led by exports to the U.S., amid worsening trade conditions stemming from recent U.S. tariff hikes.

	○	The global economic slowdown, driven by worsening trade conditions, is expected to exert mounting downward pressure on economic activity, particularly in exports.

	-	Global growth forecasts, especially for the U.S. and China, have been significantly downgraded, while elevated volatility in global financial markets is dampening economic sentiment both domestically and globally.

Summary

Policy Study KOR A Life-Cycle Overlapping Generations Model for Welfare Program Analysis

This paper utilizes a Life-Cycle Overlapping Generations (OLG) Model to assess the welfare implications of proposed universal basic income (UBI) plans. The model incorporates Korea’s income safety net programs, including the National Basic Livelihood Security, Earned Income Tax Credit, and Basic Pension. This study quantitatively evaluates the effects of financing UBI through labor income taxes on macroeconomic aggregates, inequality, and welfare. Although welfare losses are anticipated for individuals entering the steady state, the majority of current households support UBI. In contrast, a policy designed to enhance work incentives yields welfare gains for individuals entering the steady state, though its macroeconomic effects remain relatively minor.

Summary

Monthly Economic Trends KDI Monthly Economic Trends 2025. 4

■	The Korean economy is facing mounting downward pressure as external conditions deteriorate rapidly.

	○	Weakened growth in domestic and external demand is weighing on production.

	-	While equipment investment remains on a solid trajectory, continued sluggishness in construction investment and weak consumption growth are limiting the pace of domestic demand recovery.

	-	Exports have partially rebounded from their early-year lows; however, the overall pace of growth continues to moderate.

	-	As a result, construction production continued to decline sharply, while growth in industrial and service production remained modest.

	○	U.S. tariff hikes have exacerbated global trade conditions, intensifying downward pressure on exports.

	-	With trade tensions rising, global growth projections have been revised downward, and business sentiment is weakening among export-oriented companies.

	-	Export conditions further worsened as the impact of U.S. tariff hikes began to weigh on trade in April.

Summary

Monthly Economic Trends KDI Monthly Economic Trends 2025. 3

■	The Korean economy exhibits growing downside risks amid a deepening slump in the construction sector and worsening export conditions.

	○	Manufacturing production continues to improve, driven by semiconductors.

	-	Despite lower production in manufacturing due to fewer working days during the Lunar New Year and temporary public holidays, the average capacity utilization rate, adjusted for working days, maintained its upward trend.

	○	However, construction investment remains subdued, and export growth is slowing.

	-	Both construction investment and employment in the sector remain subdued, while the improvement in leading indicators is also weakening.

	-	With semiconductor export prices, a key export item, declining, the impact of rising external uncertainties is gradually spreading, keeping export growth subdued.

	○	The impact of political instability is easing, yet deteriorating external conditions are increasing downside risks to the economy.

	-	Household and business sentiment indicators are gradually recovering from the political instability shock of late last year; however, concerns over a global trade slowdown are growing, driven largely by escalating U.S.-led trade tensions.

Summary

Journal of Economic Policy KDI Journal of Economic Policy, February 2025

Exploring Revenue Trends in Alley Commercial Areas in Seoul, Korea / Hongjai Rhee

This study examines changes in sales by business category and area in Korea’s small commercial districts. Unlike previous studies that focused primarily on overall sales levels before and after the COVID-19 pandemic, this paper emphasizes temporal variations in the inequality of sales distributions. Using credit-card-based data comprising 392,832 sales records aggregated by (category, area) units, the primary analysis reveals that sales distributions have recently become more dispersed across most categories, underscoring the vulnerability of less-advantaged areas in the post-pandemic period. In a secondary analysis, regression and machine learning models were applied to investigate factors influencing regional sales disparities. The findings indicate that although overall sales, which declined sharply during the pandemic, rebounded rapidly after 2021, they have shown a significant downturn in recent periods. The paper concludes with a discussion of relevant policy implications.

The Impact of External Uncertainty Shocks on the Korean Economy / Junhyong Kim

In this paper, we analyze the impact of external uncertainty shocks on the Korean economy, focusing on Russian geopolitical risks and U.S. monetary policy uncertainty. We find that increases in external uncertainties negatively affect the Korean macroeconomy, with a particularly pronounced impact on sectors highly dependent on external markets. Our micro-level analysis reveals that the effects of external uncertainties on exports vary across different countries and sectors. A firm-level analysis further suggests that Russian geopolitical risks primarily impact the economy through real friction, while U.S. monetary policy uncertainty affects it through both real and financial friction. By identifying multiple transmission channels through both a macro- and a micro-level analysis, we provide a comprehensive understanding of how uncertainty affects the real economy. Our findings could offer valuable insights for policymakers when responding to rapidly changing external conditions.

Structural Reforms to Enhance the Sustainability and Intergenerational Equity of the National Pension System / Kang Koo Lee

This paper examines reform measures for the National Pension System, analyzing their fiscal impacts. Despite past reforms adjusting contribution and replacement rates, the system faces ongoing sustainability challenges. We forecast that the reserve fund, peaking at 1,972.0 trillion KRW in 2039, will be depleted by 2054. A scenario analysis suggests that raising the contribution rate from 9% to 18% would extend solvency but not maintain long-term stability under the current DB structure, which promises benefits that exceed contributions. This highlights the difficulty of sustaining the fund through rate increases alone.
This paper proposes a structural shift to a new cohort-based DC system (“New Pension”), which would provide benefits based on contributions and investment returns, avoiding depletion even with low birth rates. Under this plan, the “Old Pension” deficit would be supported by government funds, ensuring all generations receive at least their contributions back. For the Old Pension, the shortfall is projected to be 609 trillion KRW if limited to contributions through 2023, rising to 869 trillion KRW if extended to 2028. These results stress the importance of early reforms to ease the fiscal burden.

Financial Projection of the Basic Pension under Selective Eligibility Criteria / Dohun Kim

This study conducts a financial projection of the basic pension in Korea, which provides cash assistance to the bottom 70% of elderly individuals aged 65 and over. The projection is carried out under both expansion and selective eligibility criteria, with particular emphasis on the latter. Specifically, the study examines two well-discussed selective eligibility criteria: 1) fixing the eligibility threshold at the 2024 value and adjusting it according to the inflation rate, and 2) linking the eligibility threshold to the median household income figure. To estimate the number of recipients under these selective scenarios, the study projects the future income evolution of the elderly, assuming the continuation of past income trends. Using the financial model of the basic pension developed by Shin and Kim (2021), the study finds that total fiscal spending could be reduced by 22% under the first selective scenario and by 17% under the second selective scenario, relative to the current system, in real terms between 2024 and 2070. With these fiscal savings, the study concludes that the full benefit amount could be increased from the current level of 334,810 won to 435,000 won under the first scenario and to 405,000 won under the second scenario by 2025.

Summary

Monthly Economic Trends KDI Monthly Economic Trends 2025. 2

■	The Korean economy maintains modest production growth, while downside risks heighten amid worsening external conditions.

	○	While the manufacturing industry shows improvements, particularly in semiconductors and automobiles, overall production growth remains modest due to weaknesses in the construction industry.

	○	Domestic demand recovery remains sluggish due to weak consumption and construction investment, while export growth is gradually slowing from its previous strength, particularly in non-semiconductor sectors.

	-	Retail sales and the value of construction completed continue to decline, while household and business sentiment indicators remain at low levels.

	-	Despite strong growth in semiconductors, exports are showing signs of slowdown mainly in other sectors.

	○	As political uncertainty persists, rising external uncertainties are heightening downside risks to the economy.

	-	Concerns are growing over contracting trade conditions as tensions, led by the U.S., intensify.

Summary

Monthly Economic Trends KDI Monthly Economic Trends 2025. 1

■	The Korean economy is experiencing mounting downward pressure, as the economic recovery is delayed by slowing production growth, accompanied by weakening economic sentiment amid growing uncertainties.

	○	Semiconductor production maintained high growth, while related equipment investment and exports continued on a robust trajectory.

	○	However, excluding semiconductors, production and exports in other sectors have slowed, and domestic demand remains subdued, particularly in the construction industry.

	-	Construction production continues to decline sharply, while growth in services and non-semiconductor manufacturing is slowing.

	-	Goods consumption and construction investment continues to exhibit prolonged weakness, weighing on economic recovery.

	○	Amid growing external uncertainties, domestic political uncertainty is exacerbating economic sentiments.

	-	Despite recent political turmoil, financial market indicators, such as exchange rates and stock prices, have remained relatively stable, although household and business sentiment indices have dropped significantly (see Box).

Summary

Monthly Economic Trends KDI Monthly Economic Trends 2024. 12

■	The Korean economy exhibits signs of limited improvement, primarily in the construction industry, amid escalating uncertainties.

	○	Semiconductor production and exports continue to show robust growth, with related equipment investment maintaining its upward trend.

	○	However, goods consumption and construction investment remain subdued, constraining the recovery of domestic demand.

	-	Goods consumption continues to slide while delinquency rates among sole proprietorship businesses remain on an upward trend.

	-	Despite improving leading indicators related to construction, the value of construction completed continues to recede, while employment conditions are experiencing modest adjustments, particularly in the construction industry.

	○	Meanwhile, the deteriorating global trade environment following President Trump’s election could adversely affect Korea’s export performance.

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