KDI lowers Korea’s 2024 growth outlook to 2.2%

(Yonhap)

A major state-run think tank in South Korea slashed its 2024 and 2025 economic growth outlook for the country on Tuesday, citing sluggish domestic demand and growing uncertainty surrounding the new Trump administration’s trade policy.

The Korea Development Institute (KDI) revised its growth forecast for 2024 to 2.2 percent, down by 0.3 percentage point from three months ago, primarily due to weak domestic demand while lowering its outlook for private consumption this year to 1.3 percent from 1.5 percent in August. The state-run think tank also expected construction investment to continue declining, with a 1.8 percent decline for the year as high labor and construction costs are deterring investment sentiment.

“The downward revision of 0.3 percentage point is entirely due to domestic factors, and the export growth rate remains unchanged from previous forecasts,” Jung Kyu-chul, head of KDI‘s Economic Outlook Division, said. “We have lowered expectations for private consumption and construction investment, reflecting the delayed recovery of domestic demand.”

KDI also cited the Bank of Korea (BOK)’s delayed rate cut as a factor in the country’s economic downturn. The central bank reduced its key interest rate by 0.25 percentage point to 3.25 percent in October 2024, marking a shift in monetary policy after three years and two months.

“Rate cuts should have begun in August, given the KDI’s forecasting model,” Jung told Maeil Business Newspaper in a phone interview on Tuesday. KDI has been recommending the BOK ease its tightening stance since May.

For 2025, KDI projected Asia’s fourth-largest economy will grow 2 percent, 0.1 percentage point lower than its earlier forecast, if U.S. President-elect Donald Trump‘s proposed “universal tariff” policy is implemented from 2026 onwards. It believes that the potential instability from Trump’s re-election alone could restrict Korea’s growth to around its potential growth rate of 2 percent.

The number of employed people is also expected to shrink from 180,000 this year to 140,000 in 2025 due to a decline in the working-age population, with the unemployment rate projected to rise by 0.1 percentage point to 2.8 percent.

“In two to three years, we are likely to see growth forecasts predominantly in the 1 percent range rather than the 2 percent range, as population decline and worsening external conditions slow long-term growth,” Jung said.

Under these circumstances, experts agreed that Korea urgently needs structural reforms to create high-value-added economic growth, rather than seeking short-term fiscal policies to stimulate domestic demand.

“If 2025’s growth rate falls below our potential growth rate, fiscal intervention may be necessary, but now is not the time to use it,” Korea Institute for Industrial Economics & Trade President Kwon Nam-hoon said. “The government should support industrial reforms to boost our potential growth through labor reform and development of next-generation key industries instead.”

They were divided on monetary policy, however.

“Interest rates should align with international conditions, but there are calls for easing, given the domestic situation,” Kwon said.

However, Kim Sang-bong, an economics professor at Hansung University, cautioned against a hasty cut. “If we lower interest rates now, we will be following in the footsteps of Japan, which used a morphine-like stimulus policy via ‘zero interest rates’ in the past.”