OECD Economic Outlook, Volume 2025 Issue 1

Korea

GDP growth is projected to weaken to 1.0% in 2025 before picking up to 2.2% in 2026. Increased tariffs and uncertainty are set to hold back export growth and weaken business investment. Private consumption should pick up from late 2025 as domestic political uncertainty subsides and real wages continue to rise. Inflation will remain close to target. Increased female and elderly labour market participation will raise employment, and unemployment is set to edge down in 2026.

The Bank of Korea cut the policy rate to 2.75% in February and is expected to lower it further to 2.0% in 2025 amid weak demand. The partial reversal of large revenue shortfalls in 2023 and 2024 will contribute to the planned fiscal consolidation in 2025. Any additional fiscal support should be complemented by a sustainable long-term fiscal framework. Labour market reform can boost growth, reduce elderly poverty and lessen the high opportunity cost of motherhood.

Confidence is tested by an uncertain environment

The martial law declaration on 3 December 2024 dealt a blow to already weak domestic demand. Consumer and business confidence have been subpar. GDP contracted in the first quarter of 2025, largely driven by temporary factors holding back business and housing investment. Confidence will be boosted by the resolution of the presidential impeachment case, but uncertainty related to tariffs and international trade pulls in the opposite direction. Employment bottomed out in late 2024, and unemployment is falling back from a recent peak. Retail sales volumes have fallen in early 2025. Housing prices and construction orders have been sliding. Recent inflation readings are largely in line with the 2% target, with headline inflation at 2.1% and core inflation at 2.4% in April.

Korea

1. Quarterly averages. Only April data available for 2025Q2.

Source: OECD Economic Outlook 117 database; and Bank of Korea.

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Korea: Demand, output and prices

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Effective tariff rates applying to Korean exports to the United States have increased from 1% to 16%, and Korea has considerable trade exposure to the United States, directly and through its participation in global value chains. The Government will pursue negotiations and is not expected to respond by raising tariffs on the United States in the near term. Customs exports flatlined in the first quarter of 2025, contrary to expectations of an increase driven by front-loading ahead of the imposition of tariffs.

Monetary policy is easing while the fiscal stance remains restrictive

The Bank of Korea cut the policy rate to 2.75% in February, keeping the stance slightly restrictive. Further cuts totalling 75 basis points are expected in the course of 2025 to boost domestic demand and counteract the drag on growth from increased tariffs and uncertainty. Thereafter, the policy rate is assumed to remain at 2% until the end of 2026. A supplementary spending package of 0.1% of GDP has been legislated, with spending expected to be front-loaded in the second quarter. Fiscal policy is assumed to be restrictive, with consolidation of 1.1% of GDP over 2025-26, notably due to a partial reversal of the weak corporate income tax receipts over the past two years.

Tariffs and uncertainty hold back growth

GDP is set to grow by 1.0% in 2025 and 2.2% in 2026. Household consumption will gather strength gradually, supported by rising real incomes and improving labour market conditions. Business and housing investments are set to bounce back from the second quarter of 2025. Inflation is on course to remain around the 2% target. A prolonged slowdown in key trading partners and spiralling protectionism could further strain Korea’s trade-dependent economy.

Short-term support should not end up in long-term fiscal slippage

Further monetary policy loosening is warranted considering weak domestic demand and would help prop up investment amidst high uncertainty. Fiscal support may also be appropriate in the short term, but public debt has increased rapidly over the past few years, while reducing budget deficits according to plans has proved difficult. The agreement between the government and opposition on additional spending should therefore be followed by a bipartisan commitment to placing the public finances on a sustainable path going forward. Lowering barriers to trade and foreign direct investment, combined with growth-friendly fiscal measures such as environmental taxes, increased auctioning in the emissions trading scheme and streamlining of state support to companies could strengthen investment. Reforming the labour market to reduce duality, move decisively from seniority-based to performance-based wage setting and systematically enforce legislation against discrimination, can boost growth, lower elderly poverty and lessen the high opportunity cost of motherhood.