Seoul: A major state-run economic think tank on Tuesday sharply revised down to 1.6 percent its growth outlook for the South Korean economy this year, citing increased uncertainties both at home and abroad. The latest forecast by the Korea Development Institute (KDI) marks a 0.4 percentage-point decrease from its previous projection made in November.

According to Yonhap News Agency, domestically, political instability has weakened economic sentiment, while externally, policy shifts in the United States have worsened trade conditions, leading to the downward revision of the growth forecast, the KDI said in its latest report. The think tank noted that exports, which recorded 6.9 percent on-year growth last year, are expected to slow significantly to a 1.8 percent increase this year, as global trade tensions have intensified following the inauguration of U.S. President Donald Trump.

In addition to the direct impact of U.S. trade restrictions, the KDI said an economic slowdown in other major countries could further dampen South Korea's exports. The KDI projected the country's current account surplus will reach around US$90 billion this year, following a $99.04 billion surplus in 2024, on weakened export growth.

The report highlighted sluggish domestic demand as a key factor in slowing economic improvement last year, with conditions expected to gradually improve down the road as the effects of interest rate cuts materialize and political uncertainties subside. The KDI said private consumption, which grew 1.1 percent in 2024, is forecast to accelerate to 1.6 percent this year.

However, the figure has been revised downward from the 1.8 percent growth projected in November, reflecting weakened economic sentiment caused by political turmoil following President Yoon Suk Yeol's failed attempt to impose martial law. Facility investment is expected to grow 2 percent this year, slightly up from the 1.8 percent increase recorded in 2024, the KDI said.

Meanwhile, the construction sector is projected to contract for the second consecutive year, declining 1.2 percent this year, following a 2.7 percent contraction last year.