Signs of Recession Emerge in South Korea Amid Weak Domestic Demand and External Trade Shocks

Economic

Summary:

South Korea’s economy is showing clear signs of contraction as government-funded think tank KDI signals the first formal use of the term “recession” since early 2023.....

KDI Sounds the Alarm: Recession Warnings Reappear

In a significant development, the Korea Development Institute (KDI), a government-backed economic think tank, has used the term “economic recession” in its May 2025 economic trend report—marking the first such usage since February 2023. This declaration is a strong signal that South Korea’s economy is undergoing a downturn as both domestic and external conditions deteriorate rapidly.

According to the KDI report, South Korea’s key growth engines—construction, industrial production, and domestic consumption—remain sluggish. Particularly alarming is the steep drop in daily average exports, which have suffered amid escalating U.S. tariffs and worsening trade conditions. Exports to the U.S., a key market, have been especially affected, compounding concerns over Korea’s export-reliant growth model.

Growth Contracts in Q1, External Conditions Deteriorate

South Korea’s economy contracted by 0.246% in the first quarter of 2025, the weakest among 19 major economies that have reported data, including China and members of the OECD. This weak performance reflects the triple burden of declining global demand, elevated borrowing costs, and limited fiscal flexibility.

The KDI warns that as the global economy slows further, the pressure on South Korea’s trade-driven economy will intensify. Particularly, the sharp rise in protectionist measures—such as the new U.S. tariff regime—adds another layer of risk by shrinking market access and worsening the terms of trade.

Fiscal Strain Mounts: Rising Debt, Weak Tax Revenues

Compounding the macroeconomic malaise is South Korea’s deteriorating fiscal position. With tax revenues falling short and public spending remaining high, the nation’s debt burden is drawing increased scrutiny.

The International Monetary Fund (IMF) estimates that Korea’s debt-to-GDP ratio will rise to 54.5% in 2025, for the first time exceeding the average of 54.3% among 11 advanced economies that do not use reserve currencies. This rising debt load is raising concerns about future fiscal space and Korea’s ability to implement effective counter-cyclical measures if the downturn deepens.

Bleak Forecasts from Global Institutions

In light of these challenges, global economic institutions and investment banks have downgraded their growth forecasts for South Korea. Eight major international investment banks now expect GDP growth of just 0.8% for 2025—well below earlier expectations and significantly underperforming compared to the regional average. Meanwhile, the OECD projects growth to hover slightly above 1%, signaling persistent weakness.

The slowdown is not merely cyclical but appears to be structurally linked to deeper imbalances: overreliance on exports, underperforming domestic demand, and limited stimulus capacity due to demographic pressures and an aging population.

South Korea Enters a Period of Structural and External Vulnerability

South Korea’s economic trajectory is now confronting a critical inflection point. The re-emergence of the word “recession” in KDI’s monthly report reflects not just short-term stagnation, but a growing concern about the country’s vulnerability to global trade shifts and internal demand constraints.

Without decisive policy adjustments—including targeted fiscal support, supply-side reforms, and trade diversification—South Korea risks entering a prolonged low-growth phase. As global uncertainty intensifies and domestic policy tools remain limited, the country’s resilience will increasingly depend on its ability to adapt to a shifting global economic order.

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Glendon

Economic

Forex

The U.K. unemployment rate rose in March, data showed Tuesday, as employers anticipated the impact of higher employment costs, even before the potential impact of U.S. President Donald Trump’s volatile trade policies.

According to the Office for National Statistics, the jobless rate rose to 4.5% in the three months to March, as expected, up from the 4.4% seen in February.

However, pay growth across the whole economy, excluding bonuses, dropped to an annual 5.6% rate in the three months to March, below the 5.9% seen the prior month, and the 5.7% expected. This was the slowest increase since the three months to November last year, the ONS said.

Higher national insurance contributions and the rise in the national living wage, which both came into effect in April, appear to have deterred employers from taking on staff.

"The further softening in employment," said analysts at Capital Economics, in a note, "suggests businesses continued to respond to the rise in business taxes and the minimum wage by reducing headcount."

The Bank of England referenced a cooling labor market as it cut interest rates last week, and the policymakers will have noted a lessening in the strength of wage growth as a source of inflation pressure.

"Overall, the combination of weakening labor activity but still-high wage growth leaves the Bank in a tricky position," added Capital Economics. "If the jobs market remains weak, then underlying price pressures should eventually fade markedly. But sticky wage growth may mean the Bank remains uneasy about inflationary pressures in the near term. As a result, the “gradual” interest rate cutting path will remain the balancing act."

Additionally, the economy will have to cope with the uncertainty created by the U.S. president’s import duties, even though last week’s U.S.-U.K. trade deal may have lessened these concerns.

Source: Investing

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Catherine Richards

Stocks

Economic

Goldman Sachs Group Inc lifted its US stock targets, as the easing of trade tensions between the US and China fuels a comeback of the “Buy America” trade.

Strategists including David Kostin now see the S&P 500 Index reaching 6,500 in the next 12 months, up from 6,200 previously. The new estimate implies about a gain of about 11% from Monday’s close.

The upgrade follows Monday’s rally on Wall Street after negotiators from the world’s two largest economies agreed to temporarily lower tariffs, with traders betting that a US recession can be avoided. Goldman remains somewhat cautious, however.

“Already-optimistic market pricing of the economic growth outlook as well as uncertainty surrounding the magnitude of impending slowdown in economic and earnings growth will likely keep a ceiling on equity multiples during the next few months,” the strategists wrote in a note.

Goldman had cut its S&P 500 forecasts twice in March, citing higher recession risk and tariff-related uncertainty. The strategists said that while such concerns have eased with the latest agreement, and Big Tech stocks should especially recover, the broader earnings outlook is uneven.

“Despite the recent improvement in the growth outlook, tariff rates will likely be substantially higher in 2025 than they were in 2024, putting pressure on profit margins,” they wrote. Goldman recommends investors focus on shares of companies with high pricing power that can maintain margins in the face of elevated input costs.

Source: Theedgemarkets

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Gerik

Economic

China–U.S. Trade War

Washington Shifts Rhetoric, Signals Strategic Recalibration

Speaking in Geneva on May 12 following a week-long round of trade negotiations, U.S. Treasury Secretary Scott Bessent made clear that Washington does not intend to sever economic ties with China. Labeling existing tariffs as "tantamount to economic sanctions," Bessent emphasized that neither side desires decoupling and that a "balanced trade relationship" remains the goal.

His statement reflects a notable softening in tone, aligning with remarks he previously made on Fox News where he called for a "level playing field" rather than disengagement. The shift comes as part of a joint U.S.-China declaration announcing a 90-day agreement to halt tariff escalations and gradually reduce trade barriers.

Tariff Reductions Signal Tactical De-Escalation

Under the agreement, effective May 14, the U.S. will lower tariffs on Chinese goods from 145% to 30%, while China will cut retaliatory tariffs on U.S. imports from 125% to 10%. However, a 20% tariff on fentanyl-related products from China—enacted by the Trump administration earlier this year—will remain in place. This unresolved issue highlights ongoing friction points in the relationship.

In addition to reducing tariffs, China has agreed to unwind non-tariff retaliatory measures implemented since April 2. These included export controls on rare earths and anti-dumping probes targeting major U.S. companies like DuPont. Under the new agreement, Chinese authorities will suspend the DuPont investigation and remove restrictions on firms affected after April 2. Measures implemented prior to that date, such as the anti-dumping investigation against Google announced in February, will remain active.

China Hails Deal as "Important Step Forward"

Chinese officials described the agreement as a “significant breakthrough” in efforts to cool tensions between the world’s two largest economies. Vice Premier He Lifeng, alongside senior finance and commerce officials, praised the joint declaration as a foundation for renewed cooperation. Beijing stated that high U.S. tariffs had disrupted bilateral trade flows and global economic stability, while welcoming the re-establishment of regular consultation mechanisms.

Over the next 90 days, the two sides will operate under a temporary ceasefire while they set up a new dialogue framework. This reflects Beijing’s commitment to a diplomatic resolution through mutual respect and equal footing—principles China increasingly promotes in its international economic relations.

Mixed Signals in Enforcement and Strategic Intent

While the joint statement suggests a constructive shift, the exclusion of key enforcement rollbacks—such as the continued targeting of Google—demonstrates that deep mistrust persists. Analysts caution that the current détente may be tactical rather than transformative, aimed at reducing short-term market volatility rather than resolving systemic disputes.

The decision to retain tariffs on fentanyl-related goods, a politically sensitive issue in the U.S., reflects domestic pressure on the Biden-Trump administration to maintain a hard line in areas linked to public health and national security.

From Confrontation to Conditional Cooperation

The Geneva declaration signals a pause—not an end—to the trade war. Both sides have recognized the unsustainability of maximum-pressure tariffs, which had begun to resemble economic embargoes. By framing the agreement as a move toward balance rather than capitulation, Washington and Beijing are attempting to create political space for further dialogue.

Still, the coming months will test whether this ceasefire can evolve into a stable and mutually beneficial trade framework. With unresolved issues still on the table and an unpredictable global landscape, the current agreement is more of a reset than a resolution. For now, the world’s two largest economies have stepped back from the brink—but remain far from full reconciliation.

Source: CNN

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Gerik

China–U.S. Trade War

Economic

April Tariff Boom Fuels Budget Surplus but Signals Temporary Windfall

According to the latest data from the US Department of Commerce, tariff revenues surged to $16.3 billion in April 2025, an 86% increase from the previous month and more than double the figure recorded in April 2024. This spike pushed cumulative tariff collections for the year to $63.3 billion, up 18% year-on-year. The dramatic increase in April contributed significantly to a monthly budget surplus of $258.4 billion, up 23% from a year earlier.

The short-term revenue explosion was attributed primarily to President Donald Trump’s April 2 retaliatory tariff policy, which imposed a broad 10% levy on nearly all imported goods, supplementing existing duties on steel, autos, and electronics. As businesses rushed to front-load imports before tariffs took full effect, customs receipts ballooned.

Temporary Truce with China Begins to Cool Revenue Momentum

Despite April’s windfall, the trend may not hold. On May 1, the US and China reached a 90-day agreement to pause further tariff escalations. Under this truce, the US reduced its maximum tariffs on Chinese goods from 145% to 30%, while China lowered its retaliatory tariffs from 125% to 10%. While this brought immediate relief to global markets and businesses, it also introduced uncertainty about the long-term durability of the tariff-driven revenue surge.

Analysts warn that the halt may soon reflect in revenue trends. Research from the Peterson Institute for International Economics (PIIE) suggests that pausing tariffs—particularly on key categories like electronics and machinery—could start to erode tax income as trade flows stabilize and stockpiling fades.

The $500 Million Daily Windfall: Exceptional but Not Enduring

According to Reuters, the US government collected an average of $500 million in tariffs per day during April. This influx contributed to a broader boost in April’s total federal revenue, which rose 10% year-over-year to reach $850 billion, while federal spending declined 4%. However, while April’s surplus was impressive, the fiscal outlook remains strained.

Data from Politico reveals that as of May 8, total tariff collections had reached $46.6 billion for 2025, representing a 46.3% increase over the same period last year. But this has done little to reverse the broader fiscal imbalance: the cumulative budget deficit since the beginning of the fiscal year has reached $1.05 trillion—13% higher than the same period in 2024.

Rising Debt Servicing Costs Undermine Revenue Gains

A major driver of the growing deficit remains the cost of servicing public debt. The US public debt has reached $36.2 trillion, and in April alone, interest payments totaled $89 billion—second only to Social Security outlays. Year-to-date, interest payments have reached $579 billion, making them the second-largest expenditure in the federal budget.

The Peterson Foundation estimates that if current debt and interest rate trends persist, interest payments could consume 18.4% of total federal revenue by the end of 2025, crowding out other priorities and limiting fiscal flexibility.

Long-Term Outlook: Tax Windfall May Fade as Trade Volatility Subsides

While some economists project that a globally implemented 10% tariff regime could generate $3.9 trillion in revenue for the US over the next decade, this comes with caveats. Higher trade taxes may suppress GDP growth, weaken corporate profits, and reduce income tax collections—diminishing net fiscal benefits. Moreover, unpredictable trade policy changes can undermine business investment and long-term supply chain planning, further tempering revenue expectations.

April 2025 may go down as a historic high-water mark for US tariff revenues, temporarily boosting fiscal performance and helping offset structural deficits. Yet beneath the surface, surging debt service costs and reliance on politically fragile tariff policies pose significant long-term risks.

As the 90-day tariff ceasefire with China unfolds, policymakers will need to consider whether the short-term fiscal advantages of trade taxes justify their broader economic costs—and how to navigate revenue sustainability without compromising growth or financial stability.

Source: CNBC

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Gerik

Economic

China Deepens Economic Partnership with Latin America Through Yuan-Based Lending

Speaking at the opening of the China-CELAC Forum ministerial meeting in Beijing on May 13, President Xi Jinping pledged nearly 70 billion yuan (just under $10 billion) in credit to Latin American and Caribbean nations. This financial commitment underscores China’s intent to boost regional development while promoting the international use of its currency, the renminbi (RMB), as an alternative to the US dollar.

This latest move builds on previous efforts—such as the 2015 China-CELAC Forum where Beijing offered $20 billion in infrastructure-related credit—and signals a strategic shift in how China provides financial support abroad. Unlike earlier loans commonly denominated in dollars, this initiative emphasizes yuan liquidity and currency swap agreements that facilitate transactions in RMB rather than USD.

Currency Internationalization and Global Influence in the South

Analysts interpret the yuan-denominated credit lines as a deliberate attempt to advance China’s goal of challenging dollar dominance in international finance, particularly in the Global South. Eric Orlander of the China-Global South Project noted that Beijing is increasingly using currency swap agreements to cement long-term financial relationships with partner countries, giving them access to Chinese capital without needing to hold dollar reserves.

These credit lines may offer both development capital and a pathway for Latin American countries to diversify their foreign exchange dependencies, especially amid global concerns about dollar-driven interest rate volatility and trade exposure.

Trade Surges Past $500 Billion Milestone

President Xi also announced that bilateral trade between China and Latin America exceeded $500 billion in 2024, up from $450 billion the previous year, and a dramatic leap from just $12 billion in 2000. This trade surge reflects China’s expanding demand for Latin American commodities—such as copper, lithium, soybeans, and oil—and Latin America’s increasing reliance on Chinese imports and investments in infrastructure, energy, and telecommunications.

The China-CELAC Forum, part of Beijing’s broader Belt and Road Initiative (BRI), continues to serve as the primary platform for institutionalizing these relationships. Through it, China has promoted projects aligned with its global infrastructure ambitions while allowing partner countries to gain funding without the stringent conditions often attached to loans from Western institutions.

Visa-Free Travel: A Symbolic Gesture of Soft Power

In addition to the financial announcement, President Xi revealed that China will implement a visa-free policy for five Latin American and Caribbean countries—though he did not name them. He added that the policy would be expanded in due course. While largely symbolic, visa liberalization aligns with China's broader diplomatic strategy of fostering goodwill, people-to-people exchanges, and increased tourism or business travel with emerging economies.

Xi reiterated China’s political support for Latin America and the Caribbean in gaining a stronger voice in multilateral institutions. This aligns with Beijing’s consistent messaging that the Global South should have a greater say in international governance—messaging that resonates in regions historically marginalized in global decision-making structures dominated by Western powers.

By positioning itself as a cooperative partner in economic development and diplomatic recognition, China is offering Latin America an alternative strategic alignment at a time when US-Latin American relations remain ambivalent, particularly on trade, migration, and environmental issues.

Strategic Finance Meets Diplomatic Outreach

China’s latest commitment of yuan-based credit to Latin America reflects a sophisticated dual strategy—one that combines economic pragmatism with geopolitical influence. By tying development finance to currency internationalization and backing it with trade expansion and symbolic diplomatic gestures, Beijing is reinforcing its position as a long-term partner in the region.

Whether this soft-power approach translates into long-term alignment will depend on Latin American countries’ ability to balance Chinese capital with sovereignty concerns, and how Beijing navigates local political, environmental, and debt-related sensitivities. Nevertheless, the China-CELAC platform has become a pivotal forum in the evolving architecture of South-South cooperation—and a clear indicator of China’s expanding global economic reach.

Source: Reuters

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Gerik

Economic

Record Current Account Surplus Boosted by Foreign Income

Japan recorded a current account surplus of 30.38 trillion yen (approximately USD 208 billion) in fiscal year 2024, the highest since comparable data became available in 1985, according to the Ministry of Finance. This 16.1% increase year-on-year marks the second consecutive year of record-high surplus. The primary driver was a sharp rise in foreign investment income, which totaled 41.71 trillion yen—up 11.7%—as a weaker yen amplified overseas earnings and dividends.

While this headline figure suggests strong macroeconomic positioning, particularly in terms of external competitiveness and global investment returns, underlying trade dynamics were less positive. Japan’s merchandise trade balance posted a deficit of 4.05 trillion yen, widened by 9.8% as imports rose slightly faster than exports. Although outbound shipments of semiconductors, electronics, and automobiles grew 4.1%, imports rose 4.3% due to strong demand for personal computers and smartphones.

Tourism Recovery Helps Offset Services Deficit

The services balance also improved, with the overall deficit narrowing by 20.2% to 2.58 trillion yen. A major contributor was a record travel surplus of 6.69 trillion yen. This surge came from robust inbound tourism—Japan welcomed 38.85 million foreign visitors in FY2024, up 34.7% from the prior year—whose spending exceeded that of Japanese tourists abroad. This shift helped cushion Japan’s services sector from ongoing trade and inflation pressures.

Real Wages Decline Despite Nominal Increases

Despite robust external performance and tourism gains, household income indicators remain weak. Real wages—adjusted for inflation—fell for the third consecutive month in March 2025, dropping 2.1% from a year earlier. This followed declines of 1.5% and 2.8% in February and January, respectively. While basic wages rose 1.3%, overtime pay decreased by 1.1%, marking the sharpest drop since April 2024 and raising concerns about softening corporate activity.

Nominal total cash earnings rose 2.1% year-on-year to 308,572 yen (around USD 2,132), but this was slower than February’s 2.7% gain. Although large corporations have pledged wage hikes above 5% during the spring labor negotiations, these gains are expected to appear in government data from April onwards.

Household Spending Surprises on the Upside

In contrast to falling real wages, household consumption showed signs of resilience. Household spending in March rose 2.1% year-on-year, well above the 0.2% market expectation. Month-on-month, it increased by 0.4%. Officials attributed this rise to greater spending on utilities and recreational activities, suggesting that consumption habits are recovering despite higher living costs. Nonetheless, spending on food remains restrained as consumers adjust to rising prices.

Corporate Restructuring Accelerates Amid Uncertainty

Against this backdrop, Japanese companies are increasingly pursuing corporate restructuring. A growing number are divesting subsidiaries and non-core units to streamline operations and improve focus. Analysts attribute this shift partly to trade-related uncertainty and evolving shareholder expectations.

Japan’s 2015 Corporate Governance Code and recent reforms by the Tokyo Stock Exchange have pushed firms to address cross-shareholding, add more outside directors, and commit to transparency. Structural analysis by Jefferies strategist Shrikant Kale suggests that many Japanese firms remain overly diversified and inefficiently managed. Only one in three Japanese firms operates in a single business line, compared to two in three in the US and Europe.

This diversification, once seen as a strength, is now considered a liability. In a competitive, margin-sensitive global economy, profitability increasingly depends on operational clarity and efficient capital use—conditions not met by Japan’s traditionally sprawling corporate structures.

External Resilience Meets Domestic Constraints

Japan’s current economic narrative is marked by duality. On the one hand, strong foreign investment income and recovering inbound tourism reinforce its external strength. On the other, declining real wages, inflation-driven pressure on households, and structural inefficiencies at the corporate level continue to weigh on domestic growth.

The path forward will require balancing short-term stimulus to support consumption with long-term reforms aimed at increasing productivity and profitability. With trade policy uncertainty and demographic headwinds looming, Japan’s ability to reconcile these opposing forces will shape its economic trajectory over the coming decade.