Bank of Korea Lowers This Year's Growth Rate to 1.4%... Economic Recovery to Be Slower (Comprehensive)

Revised Economic Outlook Downgraded After Three Months

The Bank of Korea has revised its forecast for this year's real Gross Domestic Product (GDP) growth rate downward from 1.6% to 1.4%, while maintaining its consumer price inflation forecast at 3.5%. Additionally, due to continued sluggishness in IT and exports to China, the current account surplus for this year is expected to shrink by $2 billion from the previous forecast to $24 billion. Although the domestic economy, which has been struggling due to the contraction in the IT sector and delayed effects of China's reopening (resumption of economic activities), is expected to improve in the second half of the year, the pace of recovery is anticipated to be slower than initially expected.

In the revised economic outlook announced on the 25th, the Bank of Korea lowered this year's economic growth forecast from 1.6% to 1.4%. Despite improvements in consumption in the first quarter, growth was limited to 0.3% due to worsening sluggishness in exports to China and the IT sector, and the recovery momentum in the second quarter is expected to remain limited.

This growth forecast by the Bank of Korea for this year falls below the potential growth rate of the Korean economy, which is considered to be in the 2% range. A growth rate in the 1% range is the lowest since the 2000s, except for the negative growth in 2020 (-0.7%) due to COVID-19 and the 0.8% growth during the global financial crisis in 2009. The growth forecast for next year has also been lowered by 0.1 percentage points from February to 2.3%.

Looking at this year's economic outlook by sector, the Bank of Korea expects private consumption, which increased by 4.3% last year, to show a moderate recovery with a 2.3% increase this year, supported by rising household income and improved consumer sentiment. The growth rate of facility investment is expected to continue its sluggish trend, declining from -0.5% last year to -3.2% this year due to the contraction in the IT sector and financial cost burdens. Construction investment is also expected to continue its negative growth this year (-0.4%) following last year's decline (-3.5%), due to a slowdown in the real estate market and reductions in government social overhead capital (SOC) budgets. The growth rate of goods exports is forecast to fall from 3.4% last year to 0.4% this year, while goods imports are expected to decline from 4.7% to -0.2%.

Core Inflation Rate Raised by 0.3 Percentage Points to 3.3%

This year's consumer price inflation rate remains unchanged at 3.5% from the previous forecast. However, the core inflation rate has been revised upward from the February forecast of 3.0% to 3.3%. In April, the consumer price inflation rate slowed to 3.7% as energy and processed food price increases significantly eased, but the core inflation rate remained steady at 4.0%, showing resilience.

Choi Chang-ho, Director of the Research Department at the Bank of Korea, stated, "Regarding core inflation, service sector balances have been maintained better than we feared at the end of last year, and recent consumer sentiment is following suit. Employment in the service sector is also better than expected, which is slowing the pace of core inflation deceleration more than initially anticipated." He explained that the moderate slowdown in core inflation is due to strong service demand and employment trends, as well as secondary ripple effects from cost pressures.

Regarding the recent electricity rate hikes and their impact on inflation, Director Choi said, "Electricity rates increased by 19 won last year and have risen by 21 won so far this year. The increases to date have been reflected in the February forecast, and any further hikes will be decided by the government after comprehensively considering costs and public burden. If there is a significant increase, it will need to be incorporated in the next forecast."

The future inflation path is expected to be influenced by trends in international oil prices, domestic and global economic conditions, and the magnitude and timing of public utility rate hikes. The inflation forecast for next year has been lowered by 0.2 percentage points to 2.4% from the previous forecast.

[Image source=Yonhap News]

This Year's Current Account Surplus at $24 Billion... $45 Billion Next Year

This year's current account surplus is expected to slightly decrease from the previous forecast of $26 billion to $24 billion, and is projected to reach $45 billion next year. Deputy Governor Kim Woong said, "Although sluggishness in IT and exports to China continues, non-IT exports and exports to the U.S. and Europe remain relatively strong. The primary income balance is expected to increase significantly due to dividend income from overseas subsidiaries, which will largely offset the deficits in goods and services balances. The surplus is expected to remain near balance for the time being and then show a surplus trend supported by improvements in goods exports in the second half of the year."

The increase in the number of employed persons this year is expected to be 250,000, significantly exceeding the February forecast of 130,000. Although employment growth in manufacturing and other sectors is expected to slow due to economic sluggishness, labor demand in the service sector will continue with the normalization of face-to-face activities, and labor supply from women and the elderly will increase, resulting in a slower deceleration than expected. Accordingly, the unemployment rate this year is expected to fall to 3.0%, lower than the previous forecast of 3.4%.

The Bank of Korea presented two scenarios regarding the recovery of the Chinese economy, a key variable for Korea's economic recovery, given the high uncertainty. The first scenario assumes a strengthening of China's reopening momentum. Under this scenario, exports to China and the IT sector and the number of Chinese visitors to Korea would increase, and energy and raw material prices would rise, leading to a domestic growth rate in the mid-1% range and inflation in the high 3% range this year.

The second scenario assumes a delayed recovery of the Chinese economy and expanded financial instability in advanced countries. Under this scenario, exports to China and the IT sector and tourist numbers would decline, financial market volatility would increase, and international oil prices would fall, potentially lowering this year's growth rate to the low 1% range and inflation to the low 3% range.

This content was produced with the assistance of AI translation services.