South Korea’s state-run Korea Development Institute (KDI) cut its 2025 GDP growth forecast to 0.8% on Wednesday, down sharply from its earlier estimate of 1.6%. The revision makes KDI the first major domestic institution to project sub-1% growth this year, citing escalating trade tensions, a prolonged construction slump and sluggish consumer demand as key drags on the economy.

The downgrade comes despite the National Assembly’s approval of a $9.7 billion (13.8 trillion won) supplementary budget earlier this month and a $257.6 billion (366 trillion won) emergency export rescue package in February. KDI’s outlook projects a 4.2% contraction in construction investment, just 90,000 new jobs and consumer inflation of 1.7%. While the central bank may ease interest rates to boost the South Korean economy, KDI warned that the country’s fiscal space is narrowing, urging restraint on additional government spending.

WHY IT MATTERS

KDI’s forecast confirms that fiscal stimulus is no longer enough to lift South Korea’s economy out of stagnation. Moreover, the 0.8% growth forecast suggests that the ROK is now spending more to grow less. With the national fiscal deficit expected to hit 3.3% of GDP and the pension burden steadily rising, the room for expansionary fiscal policy is narrowing.

Private-sector sentiment echoes this erosion of confidence. Business survey data from April shows the business sentiment index at just 85 for May, marking 38 consecutive months of pessimism. Manufacturers were particularly downbeat, with only pharmaceuticals and food firms bucking the trend. Executives cited growing uncertainty from U.S. tariff hikes and retaliatory measures from other economies, aligning with KDI’s warning that external demand risks are now central to the outlook.

South Korea may be entering a phase of structural stagnation as exports, construction and domestic consumption are faltering simultaneously. With a snap presidential election just weeks away, investors will be watching closely to see whether the next administration can restore confidence.