S. Korea's economic growth rate in 2025 slashed to 1.6% with political instability and U.S. trade tariffs

The South Korean economy is forecast to grow one-point-six percent this year.

Now this is according to a state-run think tank following a downward revision to reflect the prolonged political paralysis here and the broader market ramifications of Trump tariffs.

Our correspondent Moon Hye-ryeon reports.

South Korea's economic growth projection for the year has been slashed on the back of rising uncertainties with U.S. trade tariffs and continued political instability in the country.

In its outlook published on Tuesday, the state-run Korea Development Institute forecasts the economy to grow point-nine percent in the first half of 2025 and two-point-two percent in the second half – bringing the annual growth rate to one-point-six percent.

That's down by point-four percentage points from its previous forecast of two percent released in November.

This is lower than forecasts from major institutions such as the OECD at two-point-one percent, but similar to the Bank of Korea's projection of one-point-six to one-point-seven percent.

The agency noted that the prolonged slump in domestic demand exacerbated by political turmoil in the country, combined with a slowdown in exports, is weighing on economic growth.

The construction sector remains in recession while the service sector struggles to recover.

Despite strong semiconductor demand, the goods exports were revised down from one-point-nine percent to one-point-five percent – reflecting deteriorating trade conditions.

Weak domestic demand is, however, likely to limit inflationary pressure – keeping the KDI's consumer price inflation forecast at one-point-six percent.

It is also expected to affect the labor market as sluggish domestic demand limits job growth.

These projections, however, come with the KDI assuming that U.S. trade restrictions under the Trump administration would be implemented gradually.

The faster-than-expected policy moves have significantly increased uncertainty.

"If trade tensions under Trump escalate further or political instability drags on longer than expected, growth could fall below the one-point-six percent we've projected."

That being said, the agency pointed out that tariffs on steel and aluminum are unlikely to have a great impact on the country's GDP growth.

"Steel and aluminum make up about point-eight percent of our total exports to the U.S., so in the grand scheme of things, it's not a huge portion of our overall portions. If the tariffs do go into effect, these industries would take a significant hit, but in terms of GDP, we don't expect the impact to be that substantial."

With weak consumption, slowing exports, and persistent uncertainty both at home and abroad, the KDI's latest outlook signals that the country's economic recovery remains vulnerable.

Moon Hye-ryeon, Arirang News.