South Korea's economic progress shows signs of improvement, yet potential risks from tariffs persist.
South Korea's Economy Shows Signs of Improvement Amidst Uncertainty
The growth prospects for South Korea's economy in the second half of 2025 are modest but improving, with expected GDP growth around 0.8% to 1.3% for the latter half of the year. This comes after a sluggish first half and is influenced by several factors including US tariffs, chip-led exports, and private consumption.
The Asian Development Bank (ADB) recently cut its 2025 growth forecast for South Korea to 0.8%, down from 1.5% earlier. The slowdown is attributed mainly to declining construction investment and exports. However, the ADB expects domestic demand to rebound in the second half of 2025, supported by political stability after the presidential election and expansionary fiscal measures.
The Bank of Korea projects a growth pick-up from just 0.3% in H1 2025 to around 1.3% in H2 2025, suggesting gradual economic improvement. The latest figure renews hopes that the South Korean economy could reach 1% growth this year.
Exports, especially chip-led exports, have been a key driver for growth. Although there are challenges in global demand, technology exports remain an important growth engine. Private consumption had weakened post-COVID but is expected to recover, supported by government expansionary fiscal policies aimed at boosting domestic demand.
The impact of US tariffs appears limited, as South Korea avoided a recession with 0.6% GDP growth in Q2 2025, suggesting resilience in exports despite trade frictions. However, exports are expected to be affected negatively by the tariffs from the third quarter onward.
The economy's real gross domestic product (GDP) in the April-June period inched up from the previous three months. The growth was mainly driven by strong exports and private consumption, both of which returned to positive territory in the second quarter. The Bank of Korea initially projected a 0.5% growth in the second quarter, but the actual growth was 0.1 percentage point higher.
The Conference Board’s Leading Economic Index for South Korea increased in May 2025, driven by exports, stock prices, and government bonds yields, signalling better macroeconomic conditions ahead. They also note some headwinds remain from trade tensions with the US but expect real GDP growth to reach about 0.7% for the full year.
Lee Dong-won, a senior official of economic statistics at the Bank of Korea, predicts a change in the trajectory of the South Korean economy in the second half of 2025 due to the full implementation of the US administration's tariff policy. If South Korea manages to secure a tariff deal similar to Japan's (15% tariff), the economic outlook is unlikely to deviate significantly from the projection made in May.
In summary, South Korea faces near-term growth constraints from external trade tensions and global economic weakness, especially affecting exports and construction investment. Nonetheless, domestic demand recovery driven by policy support and political stability is expected to improve economic growth prospects in the second half of 2025, likely leading to modest positive GDP growth around 0.8% to 1.3% during that period. The economy shows signs of weathering external pressures, including US tariffs, while chip exports and private consumption act as key pillars for growth recovery.
The improvements in South Korea's economy might significantly impact local businesses, as the growth prospects for the second half of 2025 are projected around 0.8% to 1.3%, spurred by factors such as chip-led exports and private consumption. Moreover, the finance sector may also benefit from expansionary fiscal measures aimed at boosting domestic demand.
