🚨 Korea's Economic Growth Rate Drops to 1%: Export and Domestic Triple Crisis

Today Korean Economic News | 2025.05.28

📌 Industrial Research Institute: Economic Growth Rate 2.1%→1.0% Sharp Drop... Export and Domestic 'Triple Crisis' Warning

💬 The Korea Institute for Industrial Economics & Trade has sharply lowered Korea's 2025 economic growth forecast from 2.1% to 1.0%. This analysis shows that Trump's tariff policies have caused exports to turn negative while domestic recovery remains slow, weakening overall growth momentum. Especially, the US 25% high tariffs on cars and steel - Korea's main export items - may turn annual export growth negative. In domestic sectors, high interest rates and household debt burdens have reduced consumer spending, and business investment has been delayed, greatly reducing overall economic vitality.

1️⃣ Easy to Understand

Korea's economy is in a much worse situation than expected. The shocking forecast shows economic growth will be only 1% this year. This is almost like a 'recession'.

What does 1% economic growth mean? Simply put, Korea's economy will grow only 1% in one year. This is lower than inflation (about 2%), so the economy is actually shrinking. Jobs will decrease, salaries won't increase, and company performance will likely get worse.

The biggest problem is that both main ways Korea makes money are blocked. The first is 'exports'. Korea depends on selling products to other countries. But US President Trump put a 25% tax (tariff) on Korean products, making it hard to sell Korean goods in America. Big companies like Hyundai and POSCO are getting hit hard.

The second is 'domestic demand'. This means buying and selling things inside the country. But Korean people have too much debt (household debt), so it's hard to spend money. Also, high interest rates make it difficult to get loans, and people with existing loans have higher interest payments, so they must reduce spending.

Companies are the same. They're worried about the future economy, so they hesitate to make new investments. Instead of building factories or starting new businesses, they focus on 'keeping cash'.

The government also has trouble finding solutions. If they lower interest rates, household debt might increase more. If the government spends money, it burdens national finances.

Korea's economy is stuck in a difficult situation where 'exports don't work and domestic demand doesn't work either'. In this situation, both individuals and companies need more careful economic activities.

2️⃣ Economic Terms

📕 Economic Growth Rate

Economic growth rate shows how much a country's economy grew in one year.

• It's measured by GDP (Gross Domestic Product) growth rate, usually announced yearly.
• Developed countries usually show 2-3%, developing countries 4-6%, so 1% is very low.
• Low growth rate makes job creation and income increases difficult.

📕 Tariff

Tariff is a tax on products imported from foreign countries.

• It's imposed to protect domestic industries and increase government income.
• 25% tariff makes a $100 product cost $125, greatly reducing competitiveness.
• High tariffs can sharply reduce exports to that country.

📕 Domestic Demand

Domestic demand means all consumption and investment activities within a country.

• It includes household spending, business equipment investment, and government public investment.
• Strong domestic demand helps the economy stay stable even during external shocks.
• Korea has weak domestic demand and depends heavily on exports.

📕 Household Debt

Household debt is the total amount families borrow from banks and financial institutions.

• It includes mortgage loans, personal loans, and credit card debt.
• Korea's household debt is 104% of GDP, the highest among OECD countries.
• High debt reduces spending power due to interest payments, causing domestic demand to shrink.

3️⃣ Analysis and Economic Outlook

✅ Trump's Tariff Policy Impact on Korean Exports

• Let's analyze the specific impact of US protectionist trade policy on Korea's economy.

  • First, main export products are getting hit directly. The 25% tariffs imposed by the Trump administration are dealing a fatal blow to Korea's key export items. In the auto industry, Hyundai and Kia's US exports are expected to decrease by more than 30%, about 300,000 cars annually. The steel industry is also considering stopping US exports, with major steel companies including POSCO. When 25% tariffs are imposed, Korean products completely lose price competitiveness. The shipbuilding industry is also getting indirect damage as steel material exports for ships become difficult. The export decrease of these major industries is affecting related parts suppliers and partner companies in a chain reaction.

  • Second, export market diversification cannot be a short-term solution. The US is Korea's second-largest export market, accounting for 15% of total exports. Replacing this with other markets is not easy. The Chinese market already has fierce competition with domestic companies, and European markets have distance and logistics cost problems. Emerging markets like Southeast Asia or India are relatively small and cannot completely fill the US market loss. Moreover, each market requires different product specifications and standards, making short-term export conversion impossible in many cases. As a result, this year's export growth rate may sharply turn from the previous forecast of 3.2% to -1.5%.

  • Third, long-term structural changes are inevitable due to global supply chain reorganization. US tariff policy means structural change, not temporary measures. Korean companies must establish various response strategies including expanding US local production, exporting through third countries, and developing new markets. Hyundai is already considering expanding US local plants, and Samsung Electronics is expanding investment in Texas semiconductor facilities. However, such restructuring requires enormous costs and time, making short-term profitability deterioration inevitable.

• Trump's tariff policy clearly reveals the structural weakness of Korea's export-dependent economy. This is a major challenge requiring changes to Korea's economic model itself, beyond simple trade disputes.

✅ Structural Causes of Domestic Demand Weakness and Vicious Cycle

• Let's examine the fundamental reasons why Korea's domestic economy cannot recover.

  • First, household debt problems are the core factor in consumption decline. Korea's household debt reaches 104% of GDP, the highest level among OECD countries. High interest rates (3.5% base rate) have sharply increased household interest burdens, greatly reducing disposable income. Especially households with variable rate loans have seen monthly interest payments increase 2-3 times, forcing them to save on living expenses. According to Statistics Korea, household consumption expenditure growth rate slowed from 3.1% in 2023 to 1.8% in 2024, and is expected to fall below 1% this year. This means fundamental vitality decline in the domestic market.

  • Second, job insecurity and income stagnation further reduce consumer sentiment. The Korea Institute for Industrial Economics & Trade forecasts unemployment rate will rise from 3.8% to 4.5% this year. Especially as restructuring begins in manufacturing and construction, good jobs are decreasing. Youth unemployment is more serious, possibly exceeding 10%. When jobs become unstable, people try to save money for the future and reduce consumption. This leads to decreased company sales, calling for more restructuring in a vicious cycle. Self-employed people are also experiencing increased business closures due to decreased sales, spreading job insecurity to all classes.

  • Third, companies' reduced investment sentiment makes domestic recovery even more difficult. Uncertain economic outlook has made companies delay equipment investment. This year's equipment investment growth rate is expected to be -2.3%, recording negative for two consecutive years. Especially small and medium companies have difficulty raising funds, so they cannot even make necessary investments. When companies don't invest, new jobs aren't created, which again leads to reduced consumption. Construction investment is also expected to decrease by -5.1% due to real estate market recession, holding back domestic recovery.

• Domestic demand weakness is not simply economic cycles but structural problems. Household debt, job insecurity, and investment decline are connected to each other, creating a deep recession swamp.

✅ Policy Response Limitations and Seeking New Solutions

• Let's analyze the policies the government can implement in the current situation and their limitations.

  • First, monetary policy dilemmas limit policy effectiveness. To stimulate the economy, interest rates should be lowered, but in the already excessive household debt situation, there's risk of encouraging additional debt increases. Also, considering interest rate differences with the US, significant rate cuts could cause capital outflows and exchange rate instability. The Bank of Korea is expected to make only limited rate cuts of about 0.5 percentage points this year, which won't have much economic stimulus effect. Non-traditional monetary policies like quantitative easing could also have significant side effects, requiring careful approaches.

  • Second, fiscal policy also has difficulty with aggressive expansion due to national debt burdens. The government is considering fiscal expansion through supplementary budgets, but with national debt already exceeding 50% of GDP, large-scale fiscal input is burdensome. Especially with aging population and increasing welfare expenditures, fiscal capacity is limited. Effective fiscal policy requires selective and focused support, but there's also risk of populist policies being overused due to political considerations. Ultimately, accurate targeting and efficient execution are key to enhancing fiscal policy effectiveness.

  • Third, long-term improvements through structural reforms are most important. To overcome the current economic recession, fundamental economic structural reforms are necessary. First, reduce dependence on specific countries or industries through export market and product diversification. Second, enhance domestic economy competitiveness through service industry innovation and digital transformation. Third, inclusive financial policies and income inequality reduction policies are needed to solve household debt problems. Fourth, create new growth momentum through innovative company development and startup ecosystem creation. Such structural reforms take time but are essential for sustainable growth.

• The current economic crisis has complex characteristics that cannot be solved with existing policy tools alone. Integrated approaches combining short-term crisis management with long-term structural reforms are urgently needed.

4️⃣ Conclusion

The Korea Institute for Industrial Economics & Trade's 1.0% economic growth forecast is a strong warning signal showing Korea's economy faces serious crisis. In the 'triple crisis' situation where exports and domestic demand are simultaneously weak, all traditional growth engines have stopped.

This crisis is characterized by external shocks and internal structural problems working together. External factors like Trump's tariff policies and internal problems like high household debt and weak domestic foundations have simultaneously erupted, rapidly reducing overall economic vitality.

Most concerning is that this situation cannot be resolved in the short term. The tariff problem depends on US policy changes, and household debt problems require time for structural solutions. Domestic recovery also requires stable employment and income, but all these are connected, making it difficult to break the vicious cycle.

However, there's no need to despair. Crisis is also an opportunity for change. If we fundamentally solve Korea's structural problems through this opportunity, we can become a stronger economy. We must create an economic structure resistant to external shocks through export market diversification, domestic foundation strengthening, and innovation ecosystem creation.

Individuals also need wise responses for difficult times. Avoid excessive investment or consumption and secure stable cash flow. At the same time, invest in developing new technologies and capabilities to adapt to changing economic environments.

Companies also need balanced approaches that endure short-term difficulties while building long-term competitiveness. Continue innovation investment along with cost reduction, and actively seek new markets and business models.

Ultimately, whether Korea's economy can advance through this crisis depends on how wisely the government, companies, and individuals respond. Preparing for the future becomes even more important during difficult times.