South Korea forecasts slowest growth since 2020 amid US tariff impact

South Korea projects its economy will expand by a subdued 0.9% in 2025, marking its weakest growth since the 2020 pandemic downturn. This cautious outlook is primarily attributed to the anticipated impact of upcoming U.S. tariffs on trade, despite initial resilience in first-half exports as manufacturers accelerated shipments. Officials warn that this export strength is expected to diminish post-July following a trade agreement with Washington, highlighting significant challenges for the export-driven economy amidst evolving trade dynamics with a key partner.

Analysis

South Korea's economic outlook for 2025 has been revised to a projected growth of 0.9%, the weakest pace recorded since the 2020 pandemic downturn. While this forecast is marginally higher than the Bank of Korea's 0.8% estimate from May, it signals significant headwinds for the export-driven economy. The primary driver for this cautious projection is the anticipated impact of upcoming U.S. tariffs, which are expected to weigh heavily on trade. The relative resilience of exports in the first half of the year has been attributed to manufacturers accelerating shipments to get ahead of the tariffs, a temporary effect that is not expected to last. Officials have explicitly warned that export performance is likely to soften following the conclusion of a trade agreement with Washington in late July, highlighting the economy's vulnerability to shifting trade policies with one of its largest partners.

Key Decisions for Investors

• Investors should exercise caution with exposure to South Korea's export-oriented sectors, as the 0.9% growth forecast for 2025 and anticipated U.S. tariffs present a material risk to corporate earnings.
• Monitor South Korean trade data closely post-July to assess the actual impact of tariffs, as the strength observed in the first half of the year was artificially inflated by front-loaded shipments.
• Consider underweighting broad South Korean market exposure or employing hedging strategies until there is greater clarity on the long-term trade dynamics with the U.S. and its effect on the national economy.