South Korean Economy Enters Recovery Phase, but High Exchange Rate and Sluggish Construction Weigh on Growth [2025 Growth Rate 1.0%]

[The Financial News] There is growing assessment that the South Korean economy has entered a recovery phase. Many now expect growth to strengthen this year compared with last year, but there are also concerns that weak construction investment and a high exchange rate could hold back the recovery.
According to the preliminary estimate of annual Gross Domestic Product (GDP) for 2025 released by the government on the 22nd, last year’s GDP growth rate was only 1%. However, the growth pattern improved from 0.3% in the first half to 1.7% in the second half, showing a shift from weak to stronger momentum over the year.
In the first half, the shock from the declaration of martial law combined with external uncertainties, leading to a sharp contraction in economic activity. From the second half, however, conditions improved, led by private consumption and exports, and the downturn in some construction segments also eased. The government explained that these factors together helped turn the economy’s direction around.
The government and major institutions expect the South Korean economy to grow faster this year than last year. They judge that the recovery that began in the second half is likely to continue. In fact, most major institutions forecast that South Korea’s growth rate this year will exceed last year’s.
The main basis for this outlook is the recovery in private consumption. Private consumption is expected to keep expanding this year, supported by improved real purchasing power and the impact of government policies. Better corporate earnings, a more favorable labor market, improved terms of trade, active fiscal policy, measures to boost the stock market, and expanded subsidies for electric vehicles are all seen as factors that will support consumption.
Kim Jae-hoon, Director General of the Economic Policy Bureau at the Ministry of Economy and Finance, said, “Gross Domestic Income (GDI) is showing a more favorable trend than GDP,” and added, “The increase in real income that households actually feel is likely to continue feeding into private consumption for some time.”
Exports are also expected to maintain their upward trend, driven by strong semiconductors supported by increased investment in artificial intelligence (AI). Facility investment is projected to grow in the 2% range this year, thanks to expanded semiconductor-related investment and the effects of government policies.
However, several risk factors remain. One is the pace of recovery in construction investment. Construction investment dragged down growth in 2024 and again last year. Although leading indicators began to improve in the second half and this was reflected with a time lag, partially easing the slump, some warn that the recovery could fall short of market expectations. In fact, construction investment in the fourth quarter of last year declined from the previous quarter, affected by base effects from expanded Social Overhead Capital (SOC) spending, the Chuseok holiday, and the fire at the National Information Resources Service.
The high exchange rate is another variable. A weaker won can support exports, but it also fuels inflationary pressures and may weigh on the recovery in private consumption. Stagnation in non-semiconductor sectors is likewise cited as a constraint on growth.
SONG Yeongkwan, Senior Research Fellow at the Korea Development Institute (KDI), noted, “The South Korean economy is generally expected to see stronger growth this year, but inflationary pressures stemming from a higher exchange rate and domestic and external uncertainties are a concern.” He added, “From an export perspective, industries other than semiconductors and automobiles are already close to saturation, and the prolonged slump in traditional manufacturing sectors such as petrochemicals could act as a structural drag on growth over the longer term.”
hippo@fnnews.com Kim Chan-mi Reporter