South Korea's economy faces challenges amid trade uncertainty

A state-run think tank finds economic prospects for South Korea continue to appear challenging as the construction industry remains in the doldrums while external trade risks persist.

Park Jun-han covers the latest findings.

The Korea Development Institute reported on Tuesday that South Korea's economy remained subdued, grappling with persistent weaknesses in construction and manufacturing, alongside rising trade uncertainties stemming from U.S. tariff pressure.

This assessment was according to the monthly economic trends report released by the state-run think tank.

Notably, production in May was hampered by a prolonged contraction in the construction sector, specifically a 20-point-8 percent year-on-year decline.

The construction industry is considered a key pillar of domestic demand in South Korea, with a slowdown in the sector potentially weighing heavily on the broader economy.

"Construction is closely tied to domestic demand, as it creates jobs and stimulates demand for building materials and nearby restaurants. So when the construction industry slows, that weakness ripples through the broader domestic economy."

Despite the domestic downturn, semiconductor production grew by 18-point-1 percent in May.

Also, investment in related equipment sustained high growth of 7-point-5 percent.

However, overall exports to the U.S. underperformed, growing only 1-point-9 percent, primarily due to a 16-point-1 percent drop in motor vehicle exports, driven by steep U.S. tariffs on automobiles.

Given that the United States is one of South Korea's largest export destinations, an economic expert notes that rising tariff tensions may hurt the Korean economy.

"I believe the impact of tariff uncertainty on the Korean economy is significant. If the 25% tariff is implemented, it will become more difficult for Korean businesses to export to the U.S. market. As exports decline, wage earners in export-related industries could face job insecurity."

However, the KDI pointed to signs of improved stability in the credit market and domestic consumption.

It cited the benchmark KOSPI's notable rise in June, a slight dollar depreciation, and policy expectations under the new president as factors behind improved investor sentiment.

The institute also emphasized that a gradual easing of high interest rates and stimulus measures in the second supplementary budget aimed at boosting domestic consumption are likely to support a recovery in spending.

Park Jun-han, Arirang News.