OECD Economic Outlook, Volume 2025 Issue 2

Korea

GDP growth is projected to weaken to 1.0% in 2025, before picking up to 2.1% in 2026 and 2027. Private consumption is supported by fiscal and monetary easing and rising real wages. Increased female and elderly labour market participation will expand employment, and the unemployment rate will remain low. Headline consumer price inflation will remain in line with the 2% target. Exports are supporting growth but are expected to slow in the medium term. Uncertainty over tariff negotiations and structural shifts in global supply chains could weigh on exports and dampen business investment.

The Bank of Korea cut the policy rate to 2.5% in May and is assumed to lower it further to 2.25% by mid‑2026 amid weak domestic demand. Two supplementary budgets provided ample fiscal stimulus in 2025, but should be complemented by a sustainable long-term fiscal framework. Regulatory reform, including lowering barriers to trade and foreign direct investment and opening up sectors with heavy state involvement to competition, could boost growth.

Growth is picking up

After a contraction in the first quarter, growth picked up to 2.7% (annualised rate) in the second quarter and 5.5% in the third. The new administration enacted a supplementary budget heavily tilted towards consumption coupons. This boosted consumer sentiment, which has remained at elevated levels over the summer, notably inflating spending plans. Business sentiment has improved since early 2025 but remains low. Employment fell by 0.5% in October, unwinding gains in September likely related to the timing of the lunar holiday, while the unemployment rate has stabilised at historically low levels of around 2.5%. House price increases in the Seoul area have triggered two rounds of tightened lending limits in pressure areas.

Korea

1. Data refers to Seoul Metropolitan Area.

Source: OECD Economic Outlook 118 database; and KOSIS.

Statlink

Korea: Demand, output and prices

Statlink

Korea has considerable trade exposure to the United States, directly and through its participation in global value chains. Under the Korea Strategic Trade and Investment deal, tariff rates on most Korean exports to the United States have increased from 0% under the US-Korea Trade Agreement to 15%. This is conditional on USD 350 billion of Korean direct investment in the United States, of which USD 150 billion relates to on-going cooperation on shipbuilding. The remaining investments are subject to the identification of viable projects and capped at USD 20 billion per year. Industrial production expanded considerably in August and September, and exports showed strong gains, particularly in the non-tech sector.

Fiscal policy has turned supportive, while monetary easing is set to continue

Two supplementary budgets, together amounting to approximately 1% of GDP, have turned fiscal policy expansionary. Around half of the stimulus came in the form of consumption coupons, with a direct although temporary boost to growth. No consolidation plan exists, and the government projects fiscal deficits, excluding surpluses from social security funds, to remain above 4% of GDP in the years to come, despite a forecasted cyclical increase of corporate income tax receipts. The Bank of Korea cut the policy rate to 2.5% in May. A further 0.25% rate cut is expected in the first half of 2026.

Growth is set to strengthen

GDP is projected to grow by 1.0% in 2025, strengthening to 2.1% in 2026 and 2027. Headline inflation is set to remain close to the 2% target. Employment will continue to expand, largely due to increased labour market participation of women and older workers. The unemployment rate will stabilise at current low levels. Consumption coupons will boost household spending in the short term, while monetary easing, rising real incomes and a resilient labour market will sustain consumption in 2026-27. Exports will support growth in the short term, despite increased tariffs, but are expected to slow in the medium term. Growth could be higher than projected if households consume a larger share of their rising income and public transfers than assumed. Conversely, uncertainty over tariff negotiations and structural shifts in global supply chains could weigh more heavily on exports and dampen business investment.

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

Further monetary policy loosening is warranted considering weak domestic demand. Ageing will exert considerable future spending pressures. Spending plans should therefore be followed by a bipartisan commitment to putting public finances on a sustainable path. Lowering barriers to trade and foreign direct investment, opening up sectors with heavy state involvement to competition, and speeding up the wider application of regulatory inventions successfully trialled in Korea’s well-developed regulatory sandbox system can boost productivity. Over time, housing price increases in and around Seoul reflect that the size and quality of sold housing units have increased. The recent tightening of macroprudential regulations in these areas from already stringent levels may come with diminishing returns and increasing costs to growth. Furthermore, it restricts access to segments of attractive housing for all but high-wealth individuals. 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.