[Q&A] BOK Maintains This Year's Growth Forecast: "Impact of China Offset by US Economy and Yukeo"

Bank of Korea Economic Outlook Briefing Q&A
"Chinese Group Tourists, This Year's Growth Rate Up by 0.06%p"
"Next Year's Forecast 2.2%... High Uncertainty"

The Bank of Korea maintained its economic growth forecast for South Korea at 1.4% for this year, the same as in May, despite concerns over a slowdown in the Chinese economy. On the 24th, the Bank's Research Department stated, "We expect the impacts of the U.S. and China on the domestic economy to offset each other." Despite the Silicon Valley Bank (SVB) incident, the U.S. economy showed strong resilience, and considering the increase in Chinese tourists due to the allowance of group tours, the growth forecast was not lowered this year.

The Bank of Korea estimated that the number of Chinese entrants due to the allowance of group tours will increase by 830,000 in the second half of this year compared to the May forecast, and analyzed that the effect on boosting the Gross Domestic Product (GDP) growth rate is estimated at +0.06 percentage points.

However, the Bank lowered its growth forecast for next year to 2.2%, down 0.1 percentage points from the May forecast. The Research Department explained, "There is significant uncertainty regarding the future direction of the Chinese economy and its domestic ripple effects, the economic trends of major advanced countries, and international energy prices."

Below is a Q&A session from the revised economic outlook briefing with the Bank of Korea's Research Department.

- Did the decision to take a closer look at China-related risks influence this economic outlook? Is there room for adjustment in the growth forecast related to the Chinese economy later on?

▲(Kim Woong, Deputy Governor) Due to the high uncertainty surrounding China's economic situation, we applied a scenario approach. There is a baseline scenario and a downside pressure scenario. The downside pressure scenario involves China's real estate problems spreading into financial instability. In that case, the growth forecast was lowered to the low to mid-1% range. It is difficult to gauge how the Chinese government will respond and how many group tourists will enter. We expect to be able to assess these two factors around September. We will present updated figures then.

- The current current account surplus forecast was raised from $24 billion in May to $27 billion. The forecast for the goods trade surplus also increased. What is the reason?

▲(Choi Chang-ho, Director of Research Department) The upward revision of the current account forecast is largely due to an improvement in the goods trade balance. The current account surplus in the first half of the year was better than expected. In the second half, group tourism is a positive factor. Although exports were lower than initially expected, imports decreased even more, resulting in an overall increase. Exports to China recovered slowly, and imports declined due to a slowdown in facility investment and a larger reduction in energy imports, which led to an overall improvement in the goods trade balance.

- You estimated that the number of Chinese group tourists will increase in the second half of the year after the allowance. What is the basis for this estimate, and how much impact does it have on South Korea's economic growth?

▲(Choi Chang-ho) Countries that resumed group tourism before us include Singapore and Thailand. Among them, we applied the recovery speed of Chinese tourists in Singapore, which has a similar pattern to ours, to estimate the effect. The impact on this year's growth rate is about 0.06 percentage points, and about 0.04 percentage points for next year.

- What is the reason for assuming that the tightening stance of major countries will last longer than expected?

▲(Choi Chang-ho) We made this judgment based on the global economic situation. The first half of the year went well, centered on services, and the impact of interest rate hikes is expected to slow in the second half. Inflation is slowing slowly due to a strong labor market, and expectations for a soft landing in the U.S. are increasing. Market interest rate expectations are also being adjusted. In May, there was an expectation of a rate cut within the year in the U.S., but now it has shifted to around next year. We considered these factors in our forecast.

- How was government spending calculated in the economic outlook? Was it assumed that spending would proceed as planned despite tax revenue shortfalls?

▲(Kim Woong) The government is currently conducting a tax revenue re-estimation. We are waiting for the results. The government is considering various ways to cover the tax shortfall. To understand the impact on the growth forecast, the government's plan must be established. We can discuss specific numbers once the tax re-estimation results are out. Also, since next year's budget is related, we will provide information once the budget proposal is released, likely in the fourth quarter.

- The growth forecast for this year remains at 1.4%, the same as in May. How were the impacts of China and the U.S. applied?

▲(Choi Chang-ho) Initially, we thought the U.S. would maintain a solid trend centered on consumption and labor, but the SVB incident occurred. We expected bank instability to affect credit tightening, but the U.S. economy showed considerable resilience. The credit tightening impact was minimal, and housing prices even rebounded. Considering this, we raised the growth forecast. For China, the forecast was lowered due to real estate downturn and weak external demand. We expect the impacts of the U.S. and China to offset each other.

- Private consumption is weak, but why do you expect consumption to recover moderately and growth to improve?

▲(Choi Chang-ho) After easing quarantine measures last year, private consumption rebounded mainly in services but stalled in the second quarter. Rain on weekends in the second quarter constrained consumption, continuing through July. Looking at item categories, semi-durable goods like outdoor clothing and face-to-face services declined. Excluding these, consumption was positive. We expect these temporary factors to disappear and recovery to resume, but overall, high interest rates and principal and interest repayment burdens will act as constraints, so the recovery will be moderate.

- Housing price growth is rising, but what is the basis for judging that it is too early to say the market is in a recovery phase?

▲(Kim Woong) Whether looking at official indicators from the Korea Real Estate Board or actual transaction prices, there are differences between the metropolitan area and non-metropolitan areas and among regions, making it difficult to make a definitive judgment. Actual transaction prices fell sharply by up to -15% last year. They turned positive in February, which should be seen as a process of a soft landing. There is consensus that household loans are increasing after housing prices have stabilized. Opinions vary depending on the observer.

(Choi Chang-ho) Our own survey showed that while a decline was dominant at the beginning of the year, expectations for price increases have recently grown. However, there are still expectations for declines. There are various opinions, including that the recent transactions are mainly for actual demand and that prices may adjust after this demand is exhausted despite supply shortages.

- There are differing views on recent international oil price forecasts. What is the background for the Bank of Korea's downward revision?

▲(Kim Woong) In May, the forecast was in the $70 range for Brent crude. After Saudi Arabia announced production cuts, prices rose to the mid-$80s. We had assumed $81 in the second quarter forecast, but the actual price is now $78. The second quarter actuals were a downward revision factor. Also, we considered the downside risk from China's weakening recovery in oil demand. Prices are gradually rising in the second half. There are many uncertainties regarding international oil prices from both demand and supply perspectives, so we will continue to monitor.

- What is the basis for the forecast that the semiconductor industry will rebound in the fourth quarter?

▲(Kim Woong) Although the export value of customs clearance is decreasing, semiconductor volumes turned positive from May. Prices are not falling further. The semiconductor downturn appears to be easing. Regarding the timing of price rebounds, we listen to major institutions, which expect prices to rise from the fourth quarter. The three momentum factors are production cuts, increasing demand for high-performance semiconductors related to artificial intelligence (AI), and restocking by downstream companies. Major institutions commonly expect prices to rise from the fourth quarter. However, the U.S.-China conflict remains a risk factor to watch.

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