Source: TrendyNews Korea

South Korea's Economic Growth Forecast at 0.8% in 2025, Construction Investment Decline Weighs Heavily

South Korea's economy is projected to achieve just 0.8% growth in 2025, marking a significant slowdown driven primarily by a sharp decline in construction investment. This forecast represents one of the lowest growth rates in the country's modern economic history, reflecting complex challenges that include weakening domestic investment and evolving global trade dynamics.

For American readers, this growth rate is comparable to the U.S. economy during mild recession periods, though Korea's situation differs significantly due to its export-dependent structure and unique demographic challenges. While the U.S. economy has averaged around 2-3% growth in recent years, Korea's projected 0.8% reflects more severe structural adjustments in its key industries.

Construction Investment Plummets 8.1%, Dragging Economic Growth

The primary factor behind the modest 0.8% growth projection is a severe contraction in construction investment. Following a -3.3% decline in the previous year, construction investment is expected to plummet by 8.1% in 2025, reflecting the delayed impact of reduced construction orders during the high interest rate period.

This dramatic decline stems from structural changes in Korea's real estate market, government property policies, and the persistent high interest rate environment. The combination of these factors has created a perfect storm affecting the construction sector. Notably, Seoul and surrounding metropolitan areas have experienced significant reductions in new construction projects, while urban redevelopment and reconstruction projects face unprecedented delays.

For American audiences, this situation is somewhat similar to the U.S. housing market corrections of 2008 and 2022, though Korea's construction sector plays a larger role in the overall economy. Construction investment accounts for approximately 15% of Korea's GDP, compared to about 4-5% in the United States, making its decline particularly damaging to overall economic performance.

Domestic Recovery Emerges, But Exports Slow

Despite construction sector challenges, domestic consumption shows signs of gradual recovery. Private consumption is projected to grow 1.3% in 2025 and 1.5% in 2026, supported by declining interest rates and government consumption stimulus measures. This improvement reflects recovering consumer confidence and strengthening real purchasing power among Korean households.

Equipment investment is also expected to maintain modest growth at 1.8% in 2025 and 1.6% in 2026, despite external uncertainties. The semiconductor industry's favorable conditions and declining interest rates are primary drivers of this investment growth. Particularly significant is the surge in AI and data center-related investments, which are becoming key growth engines for Korea's technology sector.

However, the export sector faces significant headwinds. Deteriorating external conditions, including potential U.S. tariff increases and global trade tensions, are expected to severely dampen export growth to just 2.1% in 2025 and 0.6% in 2026. For a trade-dependent economy like Korea, where exports account for over 40% of GDP (compared to about 12% for the U.S.), this export slowdown represents a substantial economic challenge.

Won-Dollar Exchange Rate Threatens 1,400 Won Threshold

Currency volatility presents another significant concern for Korea's economic outlook. The won-dollar exchange rate is projected to start at 1,393 won at the end of September and average 1,399 won in October, with potential spikes reaching 1,422 won. This would push the exchange rate into the psychologically important 1,400 won territory for the first time in recent years.

Over the past month, the Korean won has weakened 0.46% against the dollar, and 4.00% over the past twelve months. This depreciation reflects a combination of U.S. monetary policy changes, global economic uncertainty, and structural challenges within Korea's economy. The weakening won creates inflationary pressures while making imports more expensive, particularly impacting energy and food costs.

For American readers, this exchange rate movement is significant because Korea is a major U.S. trading partner and technology supplier. A weaker won makes Korean exports more competitive but also reflects underlying economic stress that could affect bilateral trade relationships and supply chains for American companies operating in Korea.

Monetary Policy Dilemma and Outlook

The Bank of Korea faces a challenging monetary policy dilemma. While economic stimulation requires interest rate cuts, exchange rate stability and inflation management demand a cautious approach. The current 2.50% base rate level requires careful consideration of external economic conditions and domestic price trends before any additional cuts are implemented.

Experts believe that declining interest rates will positively impact private consumption and equipment investment. However, they warn that rapid rate cuts could trigger asset market overheating and household debt increases, creating new economic imbalances. This delicate balance is similar to challenges faced by the Federal Reserve, though Korea's smaller, more open economy makes it more vulnerable to external shocks.

2026 Recovery Prospects and Challenges

Encouragingly, 2026 shows promise for economic recovery. Construction investment is projected to turn positive at 2.6% growth, emerging from its prolonged slump, while sustained domestic recovery is expected to boost overall economic growth to 1.6%. This recovery trajectory would bring Korea closer to its long-term growth potential of approximately 2-2.5%.

However, realizing this recovery requires several preconditions. First, global economic stabilization and reduced protectionist policies among major trading partners are essential. Domestically, Korea needs a soft landing in its real estate market, effective household debt management, and structural reforms to enhance productivity. These challenges require coordinated policy responses across multiple government agencies and private sector cooperation.

Policy Response Direction

The Korean government is preparing multifaceted policies to address these economic challenges. Infrastructure investment expansion and private investment activation measures are under consideration to alleviate construction investment weakness. Additionally, export competitiveness enhancement through new industry development and technology innovation support will be strengthened.

Particular focus will be placed on concentrated investment in future growth drivers including semiconductors, biotechnology, and renewable energy sectors to secure medium and long-term competitiveness. Simultaneously, expanded support for small and medium enterprises and self-employed individuals will strengthen the domestic economic foundation. These policies echo similar initiatives in the United States, such as the CHIPS Act and Infrastructure Investment and Jobs Act, though adapted to Korea's specific economic structure.

The government's approach includes approximately $15 billion (20 trillion won) in infrastructure spending over the next two years, targeted tax incentives for technology companies, and expanded credit programs for small businesses. These measures aim to offset private sector weakness while building foundations for future growth.

Korea's 2025 economic outlook presents significant challenges, but appropriate policy responses combined with private sector innovation efforts could transform crisis into opportunity. Most importantly, long-term economic restructuring and building sustainable growth foundations remain crucial tasks for the country's economic future. Success in navigating these challenges will largely determine Korea's position in the evolving global economy and its ability to maintain its status as a developed market leader in Asia.

Source: TrendyNews Korea

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Original Korean Article: 2025년 한국 경제성장률 0.8% 전망, 건설투자 부진이 발목