SEOUL – The Korea Development Institute (KDI), a leading state-run economic think tank, has drastically lowered its economic growth forecast for South Korea this year to 1.6 percent. This represents a significant 0.4 percentage-point drop from the KDI’s November projection, underscoring the increasing economic headwinds facing the nation.

In its latest report released Tuesday, the KDI pointed to a confluence of domestic and international factors contributing to the downgraded outlook. Domestically, the think tank cited ongoing political instability as a major drag on economic sentiment. Externally, shifts in U.S. policy have reportedly worsened trade conditions, further complicating the economic landscape.

A key concern highlighted by the KDI is the anticipated slowdown in export growth. After robust growth of 6.9 percent last year, exports are projected to increase by a mere 1.8 percent in 2025. The KDI directly linked this slowdown to escalating global trade tensions. Beyond the direct impact of U.S. trade measures, the KDI warned that potential economic slowdowns in other major economies could further suppress South Korean exports.

Weakened export performance is also expected to impact the nation’s current account surplus, which the KDI forecasts will reach approximately $90 billion this year, down from $99.04 billion in 2024.

The KDI report also emphasized the role of sluggish domestic demand in hindering economic progress. While conditions are expected to gradually improve as the effects of interest rate cuts materialize and political uncertainties diminish, the projected growth for private consumption has also been revised downwards. Originally forecasted at 1.8 percent in November, private consumption is now expected to grow by only 1.6 percent, reflecting dampened consumer confidence.

While facility investment is projected to see modest growth of 2 percent, up from 1.8 percent last year, the construction sector is expected to continue its contraction, declining by 1.2 percent in 2025 following a 2.7 percent drop in 2024. The KDI’s revised forecast paints a concerning picture of the challenges facing the South Korean economy in the coming year.