IMF - South Korean Economy Set for Marked Recovery Next Year—Growth to Return to Potential Rate

(Sejong=Yonhap Infomax) Jun Hyung Park = The International Monetary Fund (IMF) projects that South Korea’s economy will enter a clear recovery phase next year, gradually returning to its potential growth rate.

In its “2025 South Korea Article IV Consultation Report” released on the 24th, the IMF maintained its growth forecasts for South Korea at 0.9% for 2024 and 1.8% for 2025.

The IMF mission team conducted consultations in September with key government agencies, including the Ministry of Economy and Finance and the Bank of Korea, to prepare this annual report.

The IMF’s 2024 growth forecast of 0.9% aligns with projections from the South Korean government, the Bank of Korea, and the Korea Development Institute (KDI), but is slightly below the 1.0% forecast by the Organisation for Economic Co-operation and Development (OECD).

The IMF stated, “Private consumption is expected to recover from the second half of this year, supported by accommodative monetary and fiscal policies and improved consumer sentiment following the elections.” It added, “In 2025, as domestic and external uncertainties ease and the effects of this year’s supplementary budget materialize, growth should gradually return to its potential rate.”

However, the IMF cautioned that “downside risks remain, including the potential intensification of trade and geopolitical risks, and a slowdown in semiconductor demand due to weaker artificial intelligence (AI) demand.”

Inflation is projected to remain at target levels, with the consumer price index expected to rise 2.0% in 2024 and 1.8% in 2025.

The current account surplus is expected to temporarily narrow through next year due to higher effective tariff rates, but should recover in the medium term on the back of export growth and increased overseas investment income.

On fiscal conditions, the IMF assessed, “Despite fiscal expansion, South Korea’s medium-term fiscal stance remains neutral, and fiscal capacity and debt levels are sound over the next five years.”

The IMF emphasized the need for continued structural reforms to achieve a 3% potential growth rate. “Deregulation in the service sector and for small and medium-sized enterprises, as well as broader AI adoption, are key to long-term productivity gains,” the IMF noted. “We welcome the new administration’s focus on expanding AI utilization and innovation in its economic growth strategy.”

The IMF also viewed the new government’s short-term stimulus measures positively. “Given ample policy space and current economic conditions, accommodative monetary and fiscal policies are appropriate at this time,” it said. “The prioritization of spending in this year’s supplementary budget and next year’s draft budget is in line with our recommendations.”

Additionally, the IMF advised, “Should downside risks to growth materialize, further easing measures could be considered at the appropriate time. Investment in research and development (R&D) and innovation, which have a high growth-supporting effect, should be strengthened.”

The IMF further recommended, “Efforts to expand revenue and improve spending efficiency should continue, while strengthening a credible medium-term fiscal framework—including fiscal rules—to ensure fiscal sustainability. After the recovery to potential growth, fiscal policy should be adjusted in consideration of inflationary pressures.”

Regarding the financial sector, the IMF commented, “Measures to stabilize the real estate market and manage project financing (PF) risks are positive. Recent institutional reforms, such as amendments to the Commercial Act and improvements to the foreign exchange market structure, are contributing to alleviating the ‘Korea discount’ and expanding the foundation for long-term domestic investment.”

To address external uncertainties, the IMF recommended strengthening both export and domestic demand bases. On exports, it pointed out South Korea’s high dependence on specific countries and products, suggesting the need to diversify through greater AI adoption, expanded R&D, and increased service exports.

For private consumption, the IMF highlighted the importance of strengthening household debt management, expanding employment among older workers, improving the dual structure of the labor market, and shifting to a job-based wage system to broaden income sources.

jhpark6@yna.co.kr

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