Korea’s Growth Set to Rebound in 2026 as IMF Highlights Need for Structural Reforms
The Executive Board of the International Monetary Fund (IMF) has completed its 2025 Article IV Consultation for the Republic of Korea, with the authorities granting consent for the publication of the accompanying Staff Report.
According to the Fund, Korea’s near-term outlook remains subdued, weighed down by prolonged domestic political uncertainty and global trade policy frictions. While growth has softened, inflation remains close to the Bank of Korea’s 2% target, and financial stability risks are assessed to be contained. Authorities are leveraging available policy space to stimulate activity, even as macroprudential measures are tightened to address mounting housing market pressures.
Growth is projected at 0.9% in 2025, supported by a recovery in private consumption in the second half of the year as fiscal and monetary policies turn more accommodative. The IMF expects growth to rebound to 1.8% in 2026, aided by easing uncertainties, the full impact of policy measures, and base effects. The negative output gap is expected to begin narrowing from 2026, aided by stronger domestic demand and a recovery in exports as global trade tensions ease. Inflation is forecast to remain anchored near 2%.
The current account surplus is projected to narrow in the near term, driven partly by U.S. tariff increases that are expected to weigh on Korean exports despite some reallocation efforts. Over the medium term, the surplus is expected to improve as exports recover and primary income strengthens.
The IMF noted that risks surrounding the outlook remain “firmly tilted to the downside,” citing prolonged global trade policy uncertainty, geopolitical tensions, tighter financial conditions, commodity price volatility, and potential weakness in the semiconductor sector.
Executive Board Assessment
Executive Directors commended Korea’s economic resilience amid ongoing domestic and external shocks, highlighting sound macroeconomic fundamentals and effective policy responses. While the outlook remains broadly positive, Directors acknowledged the elevated uncertainty and supported the near-term accommodative policy mix to reinforce cyclical recovery.
Monetary policy easing was deemed appropriate, with Directors emphasizing the need for clear communication and data-driven adjustments. They also reiterated that foreign-exchange interventions should remain limited to addressing disorderly market conditions.
On fiscal policy, Directors endorsed the authorities’ current accommodative stance in view of the negative output gap. Some, however, suggested that stronger countercyclical fiscal action could further bolster domestic demand. Given long-term aging-related pressures, Directors underscored the importance of returning to fiscal consolidation as growth normalizes, expediting structural fiscal reforms—especially in taxation, spending efficiency and pensions—and establishing a medium-term fiscal anchor to safeguard sustainability.
The Board noted that Korea’s financial sector remains broadly sound. Directors praised proactive steps taken to mitigate vulnerabilities in the real estate sector and urged continued monitoring of risks associated with project financing and non-bank financial institutions. They welcomed recent macroprudential tightening to temper housing market pressures and encouraged additional measures, including accelerated efforts to expand housing supply and close regulatory gaps.
Directors stressed the need for structural reforms to boost domestic demand, strengthen external resilience, and enhance long-term growth prospects. Recommendations included addressing labor market duality, managing demographic-related demand pressures, diversifying exports, supporting innovative service-sector startups, and deepening trade integration.
The Board also highlighted productivity-enhancing reforms, calling for efforts to narrow the performance gap between large and small firms, streamline regulations, drive innovation, scale the adoption of artificial intelligence, and improve capital allocation under the authorities’ Economic Growth Strategy.
