The Korea Development Institute (KDI) raised its 2025 growth forecast for the Korean economy to 2.5%, up 0.6 percentage points from its February projection of 1.9%, citing strong semiconductor exports and improving domestic demand. KDI assessed that the Korean economy has entered an expansion phase above its potential growth rate, saying "the need for expansionary fiscal policy to further stimulate the economy is not high." The institute also called for flexible monetary policy, including interest rate hikes.
In its "First-Half 2026 Economic Outlook" released Thursday, KDI projected gross domestic product (GDP) growth of 3.1% in the first half and 1.9% in the second half, bringing the annual figure to 2.5%. The institute forecast 1.7% growth for next year.
KDI said that if this year's GDP growth is realized as projected, there is little need for expansionary fiscal measures such as a second supplementary budget. "Economic expansion and economic stimulus are not compatible terms," said Jung Kyu-chul, director of KDI's Department of Macroeconomic and Financial Policy Research. "If the Middle East war de-escalates to some extent, there is not much need for expansionary fiscal policy to stimulate the economy."
The 0.6 percentage point upward revision is underpinned by a semiconductor super cycle. "The positive impact of semiconductor exports was greater than the negative impact of the Middle East war," Jung explained. "The semiconductor contribution to the upward revision exceeds 0.3 percentage points." He added that growth could rise further if currently limited supply capacity is rapidly expanded alongside export growth. KDI viewed the Middle East war as a factor lowering growth by 0.5 percentage points, while the first supplementary budget was seen as adding 0.2 percentage points.
The semiconductor boom is expected to push this year's current account surplus to a record high. KDI projected the current account surplus will reach $239 billion this year and $213.7 billion next year, driven by a surge in semiconductor exports. That is nearly double last year's surplus of $123.1 billion.
Total exports are forecast to grow 4.6% this year and 2.2% next year. Despite demographic changes, the number of employed persons is expected to rise by 170,000 both this year and next, supported by recovering domestic demand.
KDI set this year's consumer price inflation forecast at 2.7%, up 0.6 percentage points from the February projection of 2.1%, which was made before the Middle East war broke out. Improving private consumption has accumulated upward price pressure on the demand side, while rising international oil prices have expanded upward pressure on the supply side. Inflation is projected at 2.2% next year. Core inflation is expected to rise 2.5% this year and 2.3% next year.
In line with price pressures, the institute also called for interest rate hikes. "If high inflation persists, rates will need to be raised," Jung said. "But whether that will be this month or in the second half is difficult to say definitively under the current uncertainty."
Private consumption is expected to grow 2.2% this year and 1.5% next year, supported by improving income conditions and government support policies despite inflationary pressure from the Middle East war. Facility investment is projected to post relatively strong growth of 3.3% this year and 2.4% next year, driven by rapidly expanding semiconductor-related demand. In contrast, construction investment is expected to grow just 0.1% this year due to the burden of rising construction costs stemming from the Middle East war, before recovering to 1.1% next year.
Uncertainty factors remain considerable, however. KDI said that if the Middle East war is prolonged, growth could deteriorate due to disruptions in raw material supplies and rising production costs. The current forecast assumed Dubai crude import prices of $91 per barrel this year and $82 next year, with the won-dollar exchange rate maintained at the current level of 1,475 won.
A potential general strike by the Samsung Electronics labor union is also cited as a variable. "It is difficult to quantify without assumptions about intensity and duration," Jung said, but warned that "if actually carried out, the direction itself would be negative."
On the fiscal side, KDI stressed the need to restructure mandatory spending. With basic pension payments and the local education finance grant expected to exceed 100 trillion won next year, the institute argued that the basic pension should be concentrated on vulnerable elderly populations, while the local education finance grant should be restructured to be linked to changes in the school-age population.
