🚨 Will Korea's Economic Growth Rate Fall to 0% Range?

Today Korean Economic News | 2025.03.29

📌 Will Korea's Economic Growth Rate Fall to 0% Range?

💬 Recently, the British economic analysis firm Capital Economics downgraded Korea's economic growth forecast for this year from 1.0% to 0.9%. The main causes are identified as U.S. tariff impositions and domestic political uncertainty leading to weakened consumption and investment sentiment. Due to these concerns, the KOSPI index closed at 2557.98, down 1.89%.

1️⃣ Easy Understanding

Concerns are growing that Korea's economic growth rate could fall to the 0% range. I'll explain the background and meaning of this forecast, and its impact on our economy in simple terms.

Economic growth rate is an important indicator showing how much a country's economy has grown. Usually measured as the rate of increase in GDP (Gross Domestic Product), a higher growth rate tends to lead to more jobs and increased income. Advanced countries typically show growth rates in the 2-3% range.

Recently, the renowned British economic analysis institution Capital Economics forecast Korea's economic growth rate for this year at 0.9%. This is lower than the initial expectation of 1.0%, meaning that the Korean economy might grow less than 1%. For reference, the Bank of Korea expects 2.1% growth and the government expects 2.2%, showing a significant difference.

The biggest reason for this low forecast is the combination of external and internal factors. Externally, the possibility of U.S. tariff impositions is increasing. President Trump has announced plans to impose 10-20% tariffs on major countries including Korea, which could significantly impact the Korean economy with its high export dependency.

Internally, political uncertainty and continued stagnation in private consumption persist. With the burden of household debt, real estate market depression, and high interest rates continuing, consumption capacity is decreasing, and companies are also taking a cautious attitude toward investment.

What would be the impact if the economic growth rate falls to the 0% range? First, job creation would slow down, potentially worsening the employment situation. The employment situation for young people in particular is likely to deteriorate further. Also, as household income growth slows, improvements in living standards may be limited, and government tax revenue reductions may constrain welfare spending or infrastructure investment.

In this situation, the response of the government and central bank is important. Various policy measures are being discussed, including expanded fiscal policies for economic stimulus, consideration of interest rate cuts, and investment activation through regulatory relief. Also, a comprehensive approach is needed, such as tariff negotiations with the U.S., export market diversification, and measures to stimulate domestic demand. Citizens are also required to have the wisdom to participate in stimulating the domestic economy through healthy consumption activities while reducing unnecessary consumption.

2️⃣ Economic Terms

📕 Economic Growth Rate

Economic growth rate is an indicator showing how much a country's economic size (GDP) has increased over a certain period.

• Measured as the increase in real GDP, it shows the actual expansion of economic activity excluding the effects of inflation.
• It is used as a key indicator affecting the overall economy including employment, income, investment, and tax revenue.

📕 GDP (Gross Domestic Product)

GDP is the sum of the market value of all final goods and services produced within a country during a specific period.

• Calculated as the sum of consumption, investment, government spending, and net exports (exports-imports), it is the most common indicator measuring economic size.
• Nominal GDP refers to figures based on current prices, while real GDP refers to figures excluding the effects of inflation.

📕 Export Dependency

Export dependency is the proportion of exports to Gross Domestic Product (GDP), indicating a country's external dependence.

• Korea shows a high export dependency of about 40% as of 2024, having a structure vulnerable to changes in the global trade environment.
• The higher the export dependency, the greater the impact from external shocks (tariffs, exchange rates, trade disputes, etc.).

📕 Potential Growth Rate

Potential growth rate refers to the maximum sustainable economic growth rate without causing inflation.

• It is the growth rate achievable at the optimal utilization level of production factors such as labor, capital, and technology.
• Korea's potential growth rate is continuously declining due to aging population, stagnant productivity, etc., and is currently estimated at about 2%.

3️⃣ Principles and Economic Outlook

💡 Background and Structural Factors of Korea's Economic Growth Rate Downgrade

• Both short-term factors and structural factors are complexly working in the background of Korea's economic growth rate forecast being downgraded to the 0% range.

  • First, the possibility of U.S. tariff impositions has emerged as a significant threat to the Korean economy. The U.S. Trump administration announced plans to impose 60% tariffs on China and 10-20% tariffs on major trading partners including Korea next month. With Korea exporting about $110 billion annually to the U.S., such tariff impositions could be a direct hit. The impact is expected to be even greater if major export items such as automobiles, semiconductors, and steel are included in the tariff targets. Capital Economics analyzed that U.S. tariff impositions could reduce Korea's exports to the U.S. by up to 15%, which would have the effect of lowering the GDP growth rate by 0.4 percentage points. Also, considering the indirect impact of increased global supply chain uncertainty, the shock could be even greater.

  • Second, concerns about domestic political uncertainty and economic policy direction are growing. With recent political conflicts and uncertainties intensifying, questions are being raised about the consistency and effectiveness of economic policies. This becomes a factor negatively affecting companies' investment decisions and consumers' spending patterns. Capital Economics estimated that if political uncertainty continues, private consumption and investment could decrease by 0.5 and 1.2 percentage points respectively. In particular, economic stimulus measures or structural reforms requiring large-scale fiscal spending are likely to have weakened momentum in a situation where political consensus is difficult. Such policy uncertainty can strengthen the 'wait-and-see' attitude of businesses and households, leading to a general contraction in economic activity.

  • Third, household debt burden and real estate market depression are constraining domestic economic conditions. Korea's household debt ratio (relative to GDP) is about 105% as of the end of 2024, a high level among OECD countries. As the high interest rate environment continues, the burden of principal and interest repayments has increased, which is limiting households' consumption capacity. Also, as the adjustment in the real estate market becomes prolonged, decreased asset effects and contraction in construction investment are hindering domestic economic recovery. Construction investment is expected to show negative growth in 2025 following 2024. This simultaneous sluggishness in private consumption and investment makes it difficult to achieve domestically-led growth, weakening the buffer role against external shocks.

  • Fourth, structural factors such as aging population and productivity stagnation are weakening long-term growth potential. Korea is one of the countries where aging is progressing at the fastest rate in the world, with the working-age population starting to decrease from 2020. This demographic change leads to decreased labor input, becoming a factor continuously lowering the potential growth rate. Also, the limitations of the traditional manufacturing-centered growth model and productivity stagnation are elements darkening the long-term growth outlook. Korea's potential growth rate has fallen from 4-5% levels in the early 2000s to about 2% currently, and if this trend continues, it is expected to fall to the 1% range by 2030. Capital Economics analyzed that these structural problems combined with short-term shocks are the background for the pessimistic forecast of growth in the 0% range.

• As these short-term shocks and structural factors work together, the growth momentum of the Korean economy is significantly weakening. Particularly unlike the past high-growth era, as resilience to external shocks decreases, economic downside risks are expanding. This needs to be recognized as a structural challenge requiring a transformation of the growth paradigm, not just a cyclical economic slowdown.

💡 Impact of Economic Growth Rate in the 0% Range on Economy and Society

• If the economic growth rate falls to the 0% range, it is expected to have a wide-ranging impact on the economy and society as a whole.

  • First, the negative impact on the job market is expected to be significant. Economically, there is a close relationship between growth rate and employment. Generally, the Korean economy is known to create meaningful jobs when it grows more than 3%. Growth in the 0% range is a situation close to economic stagnation, which could greatly limit the creation of new jobs. According to Capital Economics' analysis, if the economic growth rate falls below 1%, the unemployment rate could rise from the current 3% to 4-5%. In particular, the employment situation for young people and vulnerable groups is expected to worsen, which could be a factor deepening social inequality and conflict. Also, job shortages can lead to decreased lifetime income, resulting in reduced well-being and growth potential for the entire society in the long term.

  • Second, it will also have a considerable impact on corporate performance and investment. When economic growth slows, companies tend to see deterioration in sales and profitability. Small and medium-sized enterprises and service businesses with high domestic market dependence could be hit harder. This could reduce companies' capacity for investment and potentially shrink R&D spending for securing future growth engines. Capital Economics warned that in a 0% growth scenario, corporate investment could decrease by more than 7-8% based on a minimum of 3%, which could lead to weakened long-term competitiveness. Also, deteriorated profitability can reduce companies' funding capabilities and increase the burden on the stability of the financial system with an increase in distressed companies. Particularly if the proportion of marginal companies (those with an interest coverage ratio less than 1) increases, this could expand into a 'zombie company' problem, reducing the resource allocation efficiency of the entire economy.

  • Third, it will also have a negative impact on household income and living standards. Economic growth slowdown leads to slower wage growth, causing household income stagnation. Particularly, the

• An economic growth rate in the 0% range has meaning beyond a simple figure and is a serious situation that has a wide-ranging impact on the economy and society as a whole. Considering the negative effects in various aspects such as employment, income, corporate activities, government finances, and social stability, this is a challenging factor that can affect the medium to long-term development path beyond a short-term recession. Therefore, it is time for proactive and systematic responses from economic actors.

💡 Response Strategies and Policy Recommendations to Growth Rate Decline

• In preparation for the possibility of economic growth rate decline becoming a reality, it is necessary to explore response strategies for various economic actors including the government, businesses, and households.

  • First, the government's policy response direction and priorities need to be set. In the short term, expansionary fiscal and monetary policies are needed for economic stimulus. From a fiscal policy perspective, tax cuts and spending expansions that can promote private consumption and investment can be considered. For example, temporary consumption tax reductions, expanded investment tax credits, and expanded SOC investments can be effective alternatives. From a monetary policy perspective, reducing interest rates to ease the financial burden on households and businesses is necessary. Phased interest rate cuts need to be considered to the extent that they don't harm price stability. Also, diplomatic efforts to respond to U.S. tariff impositions along with export market diversification strategies should be pursued in parallel. Customized

  • Second, strategies for securing structural growth engines from a medium to long-term perspective are also needed. Improving economic fundamentals and building a new growth paradigm in preparation for the low-growth era are important tasks. In particular, it is necessary to discover new growth engines through digital transformation, transition to an eco-friendly economy, and fostering high value-added service industries. Also, reforms that simultaneously increase labor market flexibility and stability, innovation in the education system, and activation of the startup ecosystem should provide the foundation for productivity improvement. Population policies to respond to aging, along with measures to expand the labor market participation of women and the elderly, are also important tasks. While these structural reforms may involve difficulties in the short term, they are an essential process for increasing growth potential in the medium to long term.

  • Third, establishing crisis response and innovation strategies for businesses is important. Businesses need strategic responses for survival and growth in a low-growth environment. First, they should increase resilience to external shocks through cost structure optimization and financial soundness enhancement. Also, along with improving the efficiency of existing businesses, bold portfolio reorganization into new growth businesses should be considered. In particular, an active approach to discovering growth opportunities through digital innovation, eco-friendly transition, and global market expansion is important. Large companies should focus on strengthening global competitiveness and discovering new businesses, while small and medium-sized enterprises should secure differentiated competitiveness through niche market targeting and strengthening expertise. Efforts to enhance technological prowess and creativity through industry-academic-research cooperation and open innovation should also be pursued in parallel.

  • Fourth, financial management and capacity enhancement strategies for households and individuals are also important. In an era of low growth and high volatility, individuals and households need more careful financial planning and risk management. They should increase financial stability through debt management and unnecessary spending reduction, and prepare for economic shocks through securing emergency funds and diversified investments. Also, it is important to maintain competitiveness in the changing labor market through lifelong education and capacity development. In particular, it is necessary to invest in strengthening future core competencies such as digital capabilities, creativity, and problem-solving skills. From a consumption perspective, a balanced approach that secures financial stability while maintaining quality of life through rational consumption and value consumption is important.

• Economic growth rate decline is both a challenge and an opportunity. If structural reforms and innovation are pursued from a medium to long-term perspective while responding to short-term difficulties, this could be an opportunity for the Korean economy to take a leap forward. In particular, it is necessary to seek a sustainable development path to overcome the low-growth trap through digital transformation, transition to an eco-friendly economy, and building an inclusive growth model. For this, cooperation and joint efforts from all economic actors including the government, businesses, and households are essential.

4️⃣ In Conclusion

The 0.9% economic growth forecast for Korea by the British economic analysis firm Capital Economics is a signal showing the complex challenges facing the Korean economy. Various factors such as the possibility of U.S. tariff impositions, domestic political uncertainty, household debt and real estate market depression, aging population, and productivity stagnation are weakening growth momentum.

If the growth rate falls to the 0% range, it is expected to have a wide-ranging impact on the overall economy including employment deterioration, corporate performance slumps, household income stagnation, and weakened fiscal capacity. In particular, problems such as deepening youth unemployment, small and medium-sized enterprise management difficulties, and weakened social safety nets could intensify, requiring proactive responses.

The government should consider expansionary fiscal and monetary policies for short-term economic stimulus, while focusing on securing structural growth engines such as digital transformation, transition to an eco-friendly economy, and fostering high value-added service industries in the medium to long term. Diplomatic efforts to respond to U.S. tariff impositions and export market diversification strategies are also needed.

Businesses should seek survival strategies in the low-growth era through digital innovation and discovering new growth businesses while increasing resilience to external shocks through cost structure optimization and financial soundness enhancement. Consumers also need to prepare for economic uncertainty through rational consumption, financial management, and capacity development.

The crisis situation of an economic growth rate in the 0% range can paradoxically be an opportunity for improving the fundamentals and innovation of the Korean economy. Rather than focusing on short-term growth rates, it should be taken as a turning point to build a new economic paradigm based on innovation and inclusivity, breaking away from the existing growth model.

In conclusion, while the challenges facing the Korean economy are serious, they are not insurmountable. If the government, businesses, and households all share a sense of crisis and actively pursue innovation and change in their respective areas, this crisis can be transformed into a new opportunity for future growth. Above all, it is an important time to focus on structural reforms and strengthening innovation capabilities from a medium to long-term perspective rather than short-term performance.