KIEP Forecasts Global Economic Growth Rate at 2.7%... US-China Tariff Suspension is "Normalization Process"

The Korea Institute for International Economic Policy (KIEP) has lowered its global economic growth forecast for this year to 2.7%. Regarding the recent agreement between the US and China to lower tariffs, which had been competitively raised, for 90 days, it evaluated that "(the US) is in the process of normalizing most of the numbers that were strongly pushed."

On the 13th, KIEP released the '2025 Global Economic Outlook' and explained as follows. KIEP had forecasted a global economic growth rate of 3.0% as of last November, but adjusted it down by 0.3 percentage points to 2.7% today. This is lower than the International Monetary Fund (IMF)'s forecast of 2.8% released last April.

KIEP stated, "With the inauguration of the new US administration, nationalism and protectionism have intensified," adding, "Financial market volatility has expanded, and the real debt burden is increasing, widening the growth gap." It continued, "Due to tariff uncertainties, the resurgence of inflation, and increasing fiscal deficits, there are factors for rising US Treasury yields," while "on the other hand, if the US Federal Reserve cuts rates due to a recession, and preference for US Treasuries increases, long-term rates may decline."

Regarding the won-dollar exchange rate, a shift to a weak dollar is expected. KIEP said, "The dollar has been weakening continuously since the beginning of the year due to tariff policy announcements," and "the possibility of a US economic slowdown and rate cuts in the second half, along with exchange rate policies, are factors leading to a weak dollar outlook." It added, "The won-dollar exchange rate is expected to stabilize gradually in the second half, following high volatility in the first half, due to US rate cuts and progress in tariff negotiations."

In terms of major country forecasts, the US is expected to grow by 1.3% this year due to deteriorating economic sentiment from uncertain policy directions. China is projected to record a growth rate of 4.1% as the US-China conflict and large-scale economic stimulus measures offset each other.

Meanwhile, on the same day, KIEP President Lee Si-wook commented on the tariff war initiated by the Donald Trump administration, saying, "The global economy is adrift due to a drastic change in trade order," but also analyzed that "most of the abnormal numbers will go through a normalization process."

Regarding the agreement between the US and China to significantly lower mutual tariffs for 90 days, President Lee said, "If the 145% tariff originally intended by the US on China is maintained, the effective US tariff rate would be 33.5%," adding, "This is practically an impossible number, as it is the highest since 1872 (38%)."

He further explained, "The goal of the Trump administration's tariff policy is not just to reduce the trade deficit but also to consider tariffs as an alternative resource for tax cuts," and "there is a possibility of maintaining a basic tariff of about 10% to increase federal revenue, with the rest of the tariffs open to negotiation."

Regarding the weak US dollar, he said, "There is a question of whether the dollar is truly a safe asset, leading to a direction different from what was predicted," and "after the Trump administration took office, the US dollar showed significant strength before suddenly turning weak." However, he added, "Structurally, it is difficult to say that trust in the dollar as a safe asset has collapsed."

Reporter Nam Jeong-min peux@hankyung.com