Tariff shocks predicted to halt Korea's export expansion pace
The Korea Development Institute (KDI) has released its latest economic forecast for South Korea, painting a mixed picture for the country's growth in the coming years.
According to the KDI, the economy moved past last year's slowdown but growth remains weak, with the Gross Domestic Product (GDP) expanding 0.6% in the second quarter of 2023 compared to the first quarter. However, this is still 0.5% lower than the same quarter in 2022.
The KDI has maintained a 0.8% growth forecast for South Korea in 2023. This forecast is largely attributed to the impact of a 30 trillion won ($21.6 billion) second extra budget and falling interest rates, which have resulted in an increased forecast for private consumption of 1.3%. Facility investment was also lifted 0.1 percentage point to 1.8% due to a sustained upturn in the semiconductor industry.
However, the KDI has identified key factors contributing to South Korea's projected economic slowdown in 2025. These include a deepening slump in construction investment, prolonged delays in real estate project financing, and modest export growth amid external uncertainties.
Construction investment is forecast to shrink 8.1% in 2023, steeper than the 4.2% decline projected in May and last year's 3.3% fall. This deep slump is the main drag on overall economic growth.
Despite the contraction in construction, private consumption is forecast to grow modestly (1.3-1.5%), supported by government stimulus and interest rate cuts. Facility investment is expected to rise slightly (around 1.8-2.6%), partially offsetting the contraction in construction.
Export growth is expected to increase to 2.1% in 2023, up from the previous 0.3% forecast in May. However, this growth is expected to slow down in the latter half of 2023. Export growth is expected to be 6.8% in 2024, 2.1% in 2025, and 0.6% in 2026.
The KDI emphasizes ongoing high U.S. tariffs and trade policy uncertainties, which depress export potential and create volatility. Global geopolitical instability and rising energy prices add to downside risks. Kim Ji-yeon, the KDI's lead economist for outlook, has expressed concern about escalating trade tensions between the U.S. and major economies.
Kim Ji-yeon has identified US tariffs on semiconductor products as a key export risk for South Korea. Given that Korean semiconductors are used as intermediate goods in markets such as Taiwan and ASEAN (Southeast Asia), higher tariffs in key trading partners could negatively impact the South Korean economy.
Despite these challenges, the KDI remains optimistic about the long-term growth prospects for South Korea. The Institute has kept its 2026 forecast at 1.6%. The trade account is expected to remain in surplus, with projected surpluses of $106 billion in 2025 and $91 billion in 2026.
In conclusion, the KDI projects South Korea's economy will grow just 0.8% in 2023, mainly due to a sharp contraction in construction investment compounded by weaker export growth under persistent global trade tensions and domestic financial delays. Moderation in these factors is expected to allow some recovery to 1.6% growth in 2026.
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