NABO Economic Trends & Issues (No. 135)

Published on May 21, 2025
Published by Macro-Economic AnalysisDivision

■ Economic Trends
   In March 2025, the Korean economy continued to face weak domestic demand, particularly in the construction sector, and major uncertainties at home and abroad. However, conditions have improved to some degree compared to January, when the economy suffered a serious slowdown.
   In March, production improved in both manufacturing and services compared to January, and both the composite coincident index and the cyclical component of the leading composite index recorded a MoM increase. Retail sales decreased by 0.3% MoM, mainly due to a drop in sales of durable goods. Construction completion fell by 2.7% MoM, with a decrease in both building works and civil engineering deals; facility investment also declined by 0.9% MoM, reflecting a decrease in machinery investment. On the fiscal side, the government's cumulative total expenditure decreased by KRW 4.7 trillion in February. In April, the trade balance maintained a surplus for three months in a row, at USD 4.88 billion, while exports recorded slow growth due to a decrease in exports to the US. In April, consumer prices, primarily in the services sector, increased 2.1% YoY.
   In April, the spread between the three-year treasury bond yield and the base rate was -36 basis points, widening the negative spread compared to March. The KOSPI index rose to 2,559.8, an increase of 3% compared to March 31. Household loans in February continued a rising trend, driven by mortgage loans, with housing transactions also increasing MoM. Corporate loans grew by KRW 81.9 trillion YoY. In March, the issuance of stocks and corporate bonds fell by KRW 6.2 trillion MoM. In April, the won/dollar exchange rate dropped MoM to KRW 1,438.5, although it appears volatility is expanding significantly. Foreign reserves decreased MoM to USD 406.2 billion.

■ Economic Issues: Case Analysis of the US Tariff Policy Impact
   Concerns over the future of the global trade order have intensified following US President Trump's recent announcement of a new tariff policy. These concerns are reflected in the IMF's recent forecast where the agency made significant downward adjustments to the growth rate of both the global and Korean economies. In this context, this paper estimates the impact of the US tariff policy on Korea's exports, and based on the projections, examines the downside risks to Korea's economic growth.
   This paper considers three cases ― exports to the US, exports to China, and overall trade uncertainties ― to analyze how US tariffs would impact Korea's exports (customs). Then, the projected impact is converted into real GDP growth rate to assess potential downward risks to economic growth. The analysis finds that the US tariff policy is likely to reduce Korea's exports by approximately 4-11%, lowering Korea's GDP growth rate by 0.1%p compared to the baseline forecast for 2025.
   Although the downside risks of the US tariff policy to Korea's economic growth appear to have been reduced significantly compared to initial concerns, following the US-China tariff deal on May 12, the government should continue to monitor the situation and prepare measures to minimize potential consequences as Korea's tariff rates have yet to be finalized.