After a monetary tightening cycle with +300bps rate hikes in 2022-2023, inflation declined from 5.1% in 2022 to 2.3% in 2024. As the Bank of Korea started to ease its monetary policy from the second half of 2024, delivering four -25bps cuts in a year, inflation stabilized at 2.1% in 2025. Looking forward, we expect the Bank of Korea to deliver one additional rate cut in 2026 before staying on hold, with inflation stabilizing at 2% in 2026 and 1.9% in 2027.

Following a quarter of a century of positive budget balances, South Korea has registered annual fiscal deficits since 2020, albeit relatively small ones (around -1% of GDP on average). Narrow fiscal deficits are expected to remain the norm in the coming years. South Korea’s public debt rose from 40% of GDP in 2019 to 53% in 2025 and is forecast to remain below 60% in the next few years, a still favorable ratio compared to the OECD average that is approaching 100%. 

Financing risk is deemed low in the short term but particular attention should be paid to the level of household debt, while medium term risks could arise from the exports concentration around specific sectors and the aging population. Household debt, mainly in the form of mortgages, stabilized around 90% of GDP in 2025 after a slight decrease in 2024 due to a strengthening of macroprudential policies and a slowdown in housing market prices. Overall, financial risks are largely contained, given a robust and closely regulated financial system and sufficiently capitalized banks.

Looking at South Korea’s external position, the current account balance has posted continued annual surpluses since 1998. It dropped to +1.4% of GDP in 2022 due to rising energy import prices but quickly recovered thereafter, estimated at +4.8% of GDP in 2025 and expected to remain around +4% in 2026-2027. External vulnerability potentially stems from a concentration in shipments: exports are mainly in the electronics sectors and China (20% of exports in 2024) and the US (19% of exports in 2024) remain the dominant destinations. The growing trend of protectionism could put the economy at risk. Finally, the aging population is a structural threat to the economy, as the increasing median age of the population adds pressure on pensions, health and social care, and could set the stage for harsh labor reforms.

South Korea exhibits a strong business environment. The Heritage Foundation’s Index of Economic Freedom survey of 2025 ranks it 17th in the world for doing business and 5th in Asia. It performs especially well with regard to fiscal health, property rights, business freedom, government spending, monetary freedom and judicial effectiveness, while the labor freedom, financial freedom, investment freedom and tax burden perform relatively less well. The World Bank Institute’s annual Worldwide Governance Indicators surveys regularly assign South Korea strong scores for its regulatory and legal frameworks, though the level of perceived corruption has some room for improvement. Our proprietary Environmental Sustainability Index ranks South Korea 40th in 2025, reflecting good resilience to climate change and favorable ratios for energy use and CO2 emissions per GDP. Yet, the renewable electricity output is very low, so the government’s efforts to develop offshore wind power will need to be monitored.

President Lee Jae-Myung, from the Democratic party, was elected in June 2025 following the impeachment process against former President Yoon Suk-Yeol (from the People Power Party), after his failed attempt to impose emergency martial law in December 2024. The election of a president from the Democratic party realigns the executive power with the parliamentary majority, potentially improving policymaking going forward. The government’s agenda will prioritize constitutional reforms while also advancing measures to address elevated household debt, pursuing labor market policies that strengthen worker protections and supporting private consumption. Externally, relations with North Korea are not expected to improve, in part as the latter aims to further develop strategic weapons and given the context of still-simmering tensions between China and the US.