South Korea’s economic growth is expected to slow to 1.6 percent this year, down from 2 percent in 2024, according to a new ASEAN+3 Macroeconomic Research Office (AMRO) report.

Released on March 21, AMRO’s 2024 annual consultation report on South Korea said the forecasted lowered GDP growth is partly due to the impact of US tariffs.

“The country’s export prospects may … be eroded by a significant increase in import tariffs by the US,” AMRO said, noting a sudden growth slowdown in other major economies could also affect South Korean exports.

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Since March 12, the United States has imposed a 25 percent tariff on steel and aluminum imports from all countries.

US President Donald Trump also said he will announce a 25 percent tariff on automobiles, South Korea’s largest export to the US, in April.

The AMRO report said that in the near term, domestic demand in South Korea is expected to pick up while export momentum moderates with the downswing in the tech cycle and the impact of the US protectionist trade policy.

However, the report said the interest burden and scarring effects of the COVID-19 pandemic continue to exert pressure on borrowers. It also noted pockets of risk remain in savings banks, which are more exposed to project finance loans in the real estate sector.

“Given these considerations, macroeconomic policies should be recalibrated to support growth while maintaining financial system stability,” said AMRO, which covers the 10 members of the Association of Southeast Asian Nations plus China, Japan, and South Korea.

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Last year’s fiscal deficit, excluding social security funds, was estimated at 4 percent of GDP, higher than the budgeted deficit in 2024 and the actual deficit of 3.6 percent in 2023. The report noted South Korea’s fiscal stance shifted from neutral, as intended in the budget, to slightly expansionary.

Beyond US tariff hikes, AMRO said political uncertainty following the declaration of martial law in December may have a lasting impact.

AMRO saw it denting business and consumer sentiment plus causing foreign investors and tourists to take a wait-and-see attitude, which poses additional risks to the near-term outlook for aggregate demand.

As inflation is expected to moderate more, AMRO said a continued dial-back in the restrictiveness of monetary policy would be appropriate to support the recovery in domestic demand.

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AMRO said stronger buffers and enhanced risk management are necessary for non-bank financial institutions, with macro-prudential measures to be fine-tuned further.

“Over the longer term, it is essential to strengthen fiscal discipline and implement revenue-enhancing and spending-restructuring measures,” AMRO added, noting continued efforts are needed to ensure fiscal sustainability.

Contact the writer at kelly@chinadailyapac.com