🚨 Korea's Double Economic Challenges: Growth Slowdown and Weak Domestic Demand
Today Korean Economic News | 2025.05.12
📌 Korea's Q1 Growth Rate Ranks Lowest Among 19 Major Countries... Domestic Demand Continues to Weaken
💬 Korea's real GDP growth rate for the first quarter of this year was -0.246%, the lowest figure among 19 major countries. As a result, major investment banks have lowered their annual growth forecast for Korea to an average of 0.8%. The Bank of Korea is also expected to significantly reduce its growth forecast in its economic outlook scheduled for release later this month. Experts point out that despite the recovery in semiconductor exports, the continuing slump in domestic demand is holding back economic growth.
1️⃣ Simple Explanation
Korea's economy recorded negative growth in the first quarter, facing significant difficulties. While some export sectors like semiconductors are recovering, weak domestic demand has created a serious situation for overall economic growth.
In the first quarter (January-March) of this year, Korea's economic growth rate was -0.246%, meaning the size of the economy shrank compared to the previous quarter. This is the lowest level among G20 major countries, in contrast to most developed countries such as the United States (1.6%), Japan (0.9%), and the United Kingdom (0.7%) which recorded positive growth during the same period.
The biggest reason for this poor growth is the slump in domestic demand. Domestic demand refers to consumption and investment within the country. Looking at the March industrial activity indicators, retail sales decreased by 0.8%, and equipment investment also fell by 1.2%. In particular, consumer sentiment has weakened as rising prices for items like dining out have reduced households' real purchasing power.
On the other hand, the semiconductor industry is showing clear signs of recovery. In March, semiconductor production increased by 47.5% compared to the same month last year, and exports also grew by 35.2%. This is the result of increased AI demand and completed inventory adjustments having a positive effect. However, semiconductors have limited weight in the overall economy, making it insufficient to offset the weakness in domestic demand.
The government has drafted a supplementary budget of about 12 trillion won to stimulate the economy, but economic experts forecast this will only raise the growth rate by 0.1 percentage point. Additionally, the external environment is becoming unfavorable as the United States strengthens its protectionist trade policies, imposing a 25% tariff on Korean export products.
In the end, Korea's economy is struggling with an imbalance between semiconductor-centered export recovery and weak domestic demand, with rising living costs like restaurant prices placing an even greater burden on ordinary citizens' finances.
2️⃣ Economic Terms
📕 Economic Growth Rate
Economic growth rate shows how much a country's economy has expanded over a certain period.
- It is usually measured by the growth rate of real Gross Domestic Product (GDP) and is expressed as a percentage change compared to the previous quarter or the same period of the previous year.
- A positive (+) economic growth rate means the economy is expanding, while a negative (-) value means the economy is contracting.
📕 Domestic Demand
Domestic demand includes all consumption and investment occurring within the country.
- It consists of household consumption expenditure, business equipment investment, construction investment, etc.
- It is an important indicator of the domestic economy's fundamental strength. The stronger the domestic demand, the more resilient the economic structure is to external shocks.
📕 Consumer Price Index
The Consumer Price Index measures the price changes of goods and services purchased by the average household.
- It is an index that shows price changes compared to a base year (currently 2020=100) and is announced monthly by the National Statistical Office.
- It is expressed as a rate of increase compared to the same month of the previous year, referred to as the consumer price inflation rate or inflation rate.
📕 Supplementary Budget
A supplementary budget is an additional budget prepared beyond the already established budget.
- It is drafted during economic crises, natural disasters, or when urgent fiscal needs arise, and is finalized after review and approval by the National Assembly.
- It is used as a tool for expansionary fiscal policy during economic downturns to stimulate the economy.
3️⃣ Principles and Economic Outlook
💡 Structural Causes of Poor Economic Growth
Let's look at the structural causes slowing Korea's economic growth and their impact.
First, demographic changes and declining productivity are weakening growth potential. Korea is experiencing one of the world's fastest rates of aging, with the working-age population (15-64 years) beginning to decline from 2020. This leads to decreased labor supply, negatively affecting economic growth. Additionally, the maturing of key industries and delays in fostering new industries are causing overall productivity growth to stagnate. In particular, the productivity of the service sector is only about half that of manufacturing, so as the economy becomes more service-oriented, the overall productivity growth rate slows.
Second, household debt burden and the real estate market slump are hindering domestic demand recovery. Korea's household debt is about 104% of GDP, among the highest in OECD countries. Interest burdens have increased significantly due to high interest rates, greatly limiting households' spending capacity. The decrease in asset value effects due to the real estate market slump is also a cause of reduced consumption. When housing prices fall, households reduce spending due to a perceived decrease in wealth. This effect is greater in Korea because real estate makes up a high proportion of household assets.
Third, the worsening global trade environment is a risk factor for an export-oriented economy. Korea's export competitiveness is weakening as the United States strengthens its protectionist trade policies, imposing high tariffs of 25% on Korean products. Key export items such as automobiles, semiconductors, and steel are directly affected. Additionally, with the rekindling of US-China trade conflicts causing disruptions in global supply chains, uncertainties are increasing for economies like Korea with high dependence on foreign trade. This deteriorating external environment limits export recovery and acts as a factor shrinking business investment sentiment.
Korea's economic growth slowdown is the result of multiple structural factors rather than short-term economic cycles, including demographic changes, productivity decline, household debt burden, and worsening global trade environment. These structural problems are difficult to solve with short-term economic stimulus measures alone and require improvements to the economic fundamentals from a medium to long-term perspective.
💡 The Vicious Cycle of Weak Domestic Demand and Rising Prices
Let's analyze the phenomenon of continued price increases amid a sluggish domestic economy and its effects.
First, the double burden of high prices and high interest rates is restricting household consumption. As of April, the consumer price inflation rate was 2.1%, at the Bank of Korea's price stability target level (2.0%), but restaurant prices rose higher at 3.2%. In particular, the burden of living costs that ordinary people feel is even greater, as exemplified by the average price of one serving of pork belly (200g) in Seoul exceeding 20,000 won. Additionally, as the base interest rate remains at 3.25%, the interest burden on home mortgages has also increased. With households' real disposable income decreasing, a vicious cycle of reduced spending capacity continues.
Second, consumption decline is leading to management difficulties for domestic businesses and self-employed workers. The contraction in consumption is reducing sales for domestic companies, leading to cutbacks in investment and employment. Self-employed workers in industries like restaurants and retail are experiencing the double difficulty of declining sales and increasing costs. Fixed costs such as raw material prices, rent, and labor costs continue to rise, while consumers are spending less, increasing management burden. This is creating a vicious cycle where business closures increase and jobs decrease.
Third, there are limitations to policy efforts to overcome domestic demand weakness. The government's 12 trillion won supplementary budget will be used for supporting small business owners, energy vouchers for vulnerable groups, and consumer coupons, but its effect is expected to be limited. Additionally, in a high interest rate environment, further fiscal expansion could lead to increased national debt and interest burden, requiring a cautious approach. The Bank of Korea is cautious about interest rate cuts to maintain price stability, but there are also opinions that rate cuts are necessary to stimulate domestic demand, creating difficulty in setting policy direction.
The current situation of simultaneous domestic demand weakness and price increases makes policy responses even more difficult. Tightening policies to control prices could further depress domestic demand, while expansionary policies to stimulate spending could increase price pressure, requiring a sophisticated policy mix.
💡 Future Outlook and Response Strategies for the Korean Economy
Let's explore the future outlook and solutions for the Korean economy.
First, the Korean economy is expected to recover gradually from the second half of 2025. Economic experts forecast that Korea's economic growth rate this year will only reach 0.8-1.0%. However, from the second half of the year, gradual recovery is expected due to global economic recovery, the possibility of interest rate cuts, and the semiconductor industry boom. The semiconductor industry in particular is expected to see continued growth with increasing AI demand, leading to growth in exports and equipment investment. However, domestic demand recovery is expected to be slow, so the overall pace of economic recovery will be moderate.
Second, in the short term, policy support is needed to stimulate domestic demand. First, measures are needed to increase households' spending capacity. Reducing interest burden through rate cuts, increasing disposable income through tax benefits, and expanding support for consumption through vouchers and cashback programs could help. Policies are also needed to reduce the management burden on small businesses and self-employed workers through financial support, rent stabilization, and regulatory relaxation. Tailored support for industries highly dependent on domestic demand, such as restaurants and retail, is particularly important.
Third, industry structure innovation and diversification of growth engines are essential in the medium to long term. Efforts are needed to reduce dependence on semiconductors and strengthen future industrial competitiveness. The industrial structure should be diversified through fostering new growth industries such as secondary batteries, biotechnology, aerospace, and digital content. Digital transformation support and regulatory reform to improve service sector productivity are also important. Technological innovations such as automation and robotics are needed to address labor shortage issues in response to demographic changes. Strategies such as diversifying export markets and items and restructuring global supply chains are also required to respond to changes in the global trade environment.
Although the Korean economy is currently facing difficulties, if structural improvements can turn crisis into opportunity, it can rebound with a stronger economic structure. It is important to pursue short-term economic stimulus along with industry structure innovation, strengthening the domestic demand base, and diversifying growth engines from a medium to long-term perspective.
4️⃣ In Conclusion
Korea's economy is in a difficult situation, recording negative growth in the first quarter. While some export sectors like semiconductors are showing recovery, severe domestic demand weakness has raised a red flag for overall economic growth. In particular, rising living costs such as dining out expenses and high interest rate burdens are limiting households' spending capacity.
This economic downturn is the result of structural factors working together rather than short-term economic cycles, including demographic changes, productivity decline, household debt burden, and worsening global trade environment. Therefore, fundamental solutions are difficult with short-term economic stimulus measures alone, and economic restructuring from a medium to long-term perspective is necessary.
The government is trying to stimulate domestic demand through a supplementary budget of about 12 trillion won, but its effect is expected to be limited. The Bank of Korea is considering the direction of interest rate policy between price stability and domestic demand stimulation.
Experts expect gradual recovery from the second half of 2025 due to global economic recovery, the possibility of interest rate cuts, and the semiconductor industry boom. However, the pace of recovery is expected to be moderate, requiring patience and the pursuit of medium to long-term strategies.
Ultimately, for sustainable growth of the Korean economy, efforts are needed to strengthen the domestic demand base and diversify the industrial structure rather than relying only on the boom in the semiconductor industry. In particular, it will be important to build a balanced economic structure through securing future growth engines, strengthening service sector competitiveness, and revitalizing the ecosystem for small businesses and startups.