US President Donald Trump is speaking at the Saudi-American Investment Forum held on May 13 in the King Abdulaziz International Conference Center in Riyadh, Saudi Arabia. /Ministry of Foreign Affairs

The Korea Development Institute (KDI) has significantly lowered its growth forecast for South Korea this year due to the ‘internal and external crises’ caused by sluggish trade and construction. In its '2025 Economic Outlook for the First Half,' released on the 14th, KDI projected this year's growth rate at 0.8%, halving its earlier estimate of 1.6% made in February.

KDI provided a bleak outlook, suggesting that South Korea's economy will continue to experience low growth in the 1% range not just this year but also next year. The worsening trade conditions have thrown the export-centered economic structure into crisis, and this poor export performance will create a negative cycle impacting domestic demand, which KDI expects will persist into next year.

◇ Changing trade environment daily… 'Scenario predictions are impossible'

“The South Korean economy is facing significant uncertainty.” This summarizes the economic outlook announced by KDI that day.

KDI pointed to the tariff policies implemented by the Trump administration in the United States as the biggest source of instability for the South Korean economy. KDI emphasized that if other countries respond with retaliatory tariffs while the U.S. maintains high tariff rates, this could further exert downward pressure on our country's economic growth.

The factors causing instability also have potential upside. There is a possibility that 'the export conditions could improve rapidly if trade negotiations are successfully concluded.'

Such uncertainty makes it difficult to assume 'optimistic or pessimistic scenarios' around a neutral scenario. Jeong Kyu-cheol, KDI's Deputy Minister of Economic Outlook, stated, “Under typical circumstances, optimistic and pessimistic analyses might have been possible,” adding, “Even as recently as April, it was hard to imagine the current growth scenario.” Jeong referred to the recent agreement on tariffs between the U.S. and China, stating, “This was also something totally unimaginable. It is quite difficult to prepare scenarios,” and added, “There is substantial uncertainty.”

If the South Korea-U.S. trade talks are concluded and the tariff burden is eased before the expiration of the tariff suspension on July 9, the growth rate could rise slightly. However, KDI explained that if the talks fail, the growth forecast could worsen. Jeong noted, “If we can lower the universal tariff rate of 10% a bit more, then 1% (growth) is conceivable.”

Hyundai Engineering suspends all construction at job sites nationwide after a fatal incident occurs at an apartment construction site two weeks after the highway bridge collapse. The photo shows the Hyundai Engineering construction site for the new apartment in downtown Seoul on Mar. 12. /News1

◇ Construction sector in continued decline… Improvement in orders is good news

Poor performance in the construction industry was also pointed out as a key source of instability. KDI stated, “The unsold inventory is surging, particularly in areas outside the capital, and housing prices are on the decline, indicating a downturn in the housing market. In such circumstances, if the restructuring of project financing (PF) loans in real estate is delayed and the financial soundness of construction firms deteriorates, the recovery of construction investments could be constrained.”

In the first quarter of this year, construction investment decreased by 12.2% compared to the same period last year. The decline was larger than the decrease of 6.6% reported in the fourth quarter of last year. Construction output also fell by 20.7% in the first quarter, with significant declines in both the building sector (22.8%) and civil engineering sector (14.2%).

Fortunately, leading indicators show that construction orders are improving. In the first quarter, construction orders increased by 12% (fourth quarter moving average) compared to the same period last year. However, the recent improvement in construction orders is primarily occurring in certain areas such as the capital region, large construction corporations, and maintenance projects, so the recovery of construction investment is likely to vary depending on location and the size of the firms.

KDI expects that after a 3% decrease in construction investment last year, it will decline by 4.2% this year but will return to 2.4% positive growth in 2026. However, considering the two consecutive years of decline, the recovery is expected to be modest.

Investment in facilities has shown a good trend and is driving private investment. However, worsening conditions due to increased uncertainty and the resulting dampening of corporate sentiment have been raised as concerns.

◇ Call for calm responses… Concerns about fiscal expenditures due to presidential campaign promises

KDI called for a 'calm response' to the uncertain South Korean economy. In particular, it urged restraint in providing financial support to zombie companies with low chances of survival. While the reduction of the benchmark interest rate and restructuring of real estate PF have improved the asset soundness of financial institutions, high levels of arrears in household and individual business loans are ongoing. The organization warned that caution is necessary regarding not just corporations but also debt restructuring for individual businesses.

It also emphasized the need to avoid excessive fiscal policy. This appears to reflect concerns about the current situation where major candidates are rolling out populist policy pledges ahead of the presidential election. Currently, South Korea's consolidated fiscal balance without social security fund shows a deficit of 86.4 trillion won, which is about 3.3% of the gross domestic product (GDP), leading KDI to evaluate that 'fiscal policy is being operated quite loosely.'

Jeong noted, “If the situation worsens beyond what we have projected, a supplementary budget may be necessary,” but added, “If that is not the case, it is already being operated fairly loosely, so it would be advisable to wait and see.” He further stated, “It is not desirable to loosen regulations to stimulate the economy while undermining soundness of financial policies,” and expressed hope that a loan policy aligned with repayment capacity would be consistently maintained.

In the long term, it is suggested that the flow of 'diminishing potential growth rate' must be halted through economic structural reforms. Given the ongoing decline in potential growth rates due to low birthrates and an aging population, efforts are needed to enhance productivity.