South Korea

Growth outlook clouded by export uncertainties and lacklustre domestic demand

South Korea’s economic growth rebounded in 2024, expanding by 2.0% – up from 1.4% in 2023 – supported by strong export recovery despite sluggish domestic demand. Export momentum improved, albeit with notable disparities between tech and non-tech sectors. Semiconductor exports surged 43.9% year-on-year, driven by AI-server demand, alongside growth in display panels and computers. Transportation equipment, including autos and ships, also performed well, but non-tech exports like chemicals, steel, and oil products remained weak. Domestically, facilities investment was buoyed by chip manufacturing equipment spending, but overall gross capital formation was weighed down by a 2.7% decline in construction investment amid elevated construction costs and tighter regulation of developers’ financing due to increased default risks. Private consumption grew modestly (+1.1% y/y), restricted by high debt burdens in a durably elevated interest-rate environment, despite easing inflation. The political shock arising from former President Yoon’s short-lived imposition of martial laws further dampened consumption in Q4.

Looking further ahead, South Korea’s growth may slow to 1.0% in 2025 on back of an uncertain export outlook and a tepid recovery in domestic demand. Export momentum had already weakened in Q1 even before the US announced new tariffs. On 2 April, the Trump administration proposed global reciprocal tariffs, including a 25% levy on South Korea, though the implementation of these additional tariffs beyond the baseline 10% tariffs was suspended for 90 days on 9 April. Additionally, South Korean exports are vulnerable to existing US Section 232 tariffs on steel, aluminium, and autos (25% to 50%), as well as potential tariffs on semiconductors and pharmaceutical goods. While most announced tariffs have yet to take effect (the US-Korea trade negotiations are ongoing but concrete development may stall until the inauguration of the next President in early June), growing trade uncertainty could hurt business sentiment and capital expenditure, further delaying the recovery in domestic demand.

Meanwhile, private consumption is unlikely to rebound soon, as household saving rates climb again, which likely reflect deteriorating consumer confidence due to sharper-than-expected US reciprocal tariffs and ongoing political uncertainty. On the positive side, gradual but ongoing monetary easing, together with stabilising inflation, should offset consumption somewhat and support a gradual recovery in construction investment.

Deteriorating fiscal account

South Korea’s external accounts improved in 2024 as its goods trade balance recovered. The current account recorded a surplus of USD 99.04 billion (5.3% of GDP), a significant rise from the USD 32.82 billion surplus in 2023. The rebound was driven primarily by the stronger goods account surplus, fuelled by robust semiconductor exports and lower import costs due to declining global commodity prices. However, the services account deficit remained above USD 20 billion, reflecting persistent shortfalls in manufacturing services, travel, and other business services – though it narrowed slightly as a widening transport surplus provided some offset. Looking ahead, the current account is expected to remain solid in 2025 as easing global crude oil prices and a stronger KRW mitigate external headwinds to the goods trade surplus. Meanwhile, the primary income surplus is likely to remain firm, supported by sustained high interest income.

Meanwhile, South Korea’s fiscal position deteriorated in 2024, with the managed fiscal deficit (excluding social security funds) widening significantly beyond initial projections (-4.1% of GDP versus a budgeted -3.6%). This unusually large deficit – which has exceeded 4% of GDP only during crises like the Asian Financial Crisis or the Covid-19 pandemic – was primarily driven by the shortfall in corporate tax revenue, while public welfare spending underwent only a very minor reduction. The widening gap signals a shift from fiscal discipline (a hallmark of the Yoon administration since 2022) toward more active fiscal management, as the economy struggles with an uneven export recovery and weak domestic demand. Although the 2025 managed fiscal balance is budgeted at -2.8% of GDP, the actual deficit will likely be larger due to two supplementary budgets. On 1 May, South Korea’s parliament approved a 13.8 trillion won (0.5% of GDP) additional budget, allocating funds for wildfire disaster relief, financial support for exporters and SMEs, and investments in artificial intelligence. Furthermore, given the growing risk of a tariff shock to economic growth, the new administration, which is set to take office after the early-June presidential election, may propose a second supplementary budget as early as July.

South Korea holds presidential elections following months of political turmoil

South Korea was plunged into a political crisis following former President Yoon Suk-yeol’s short-lived declaration of martial law on 3 December 2024, the first such measure since 1979. The move, justified as necessary to protect the country from North Korea and "anti-state forces", lacked concrete evidence and was swiftly overturned by Parliament within six hours after 190 lawmakers bypassed military barricades to enter the National Assembly and voted against it. The fallout escalated on 14 December 2024 when the National Assembly passed an impeachment bill against Yoon, which was upheld by the Constitutional Court in a unanimous 8–0 ruling on 4 April 2025.

With Yoon ousted from office, a snap presidential election has been scheduled for 3 June 2025. Current polls show Lee Jae-myung of the opposition Democratic Party maintaining a clear lead, despite lingering legal challenges; his trial for election law violations during 2022 presidential election was postponed until after the election. Meanwhile, Kim Moon-soo, the former Minister of Employment and Labour and candidate of the ruling party (People Power Party), has emerged as his main rival. Both candidates support AI development and pledge financial aid for small businesses and youth, but their overall fiscal stances diverge sharply. Lee advocates more redistributive measures and state-led public investment, aligning with his party’s preference for active fiscal intervention, while the party’s absolute majority in the National Assembly may help facilitate such an agenda should he win the election. Kim, on the other hand, favours market-driven approaches, including deregulation, tax cuts, and regional competition.

2022

2024

Croissance du PIB (%)

1.4

Last updated:May 2025