Reasons Why Global IB Forecasts Growth Rate in the 1% Range Next Year [Why&Next]

Domestic Demand Recovery Fails to Offset Export Slump
Further Downgrade of Forecasts Since Trump's Election
BOJ Faces Dilemma Between Growing Need for Rate Cuts and Exchange Rate Concerns

Concerns are emerging that South Korea's economy will find it difficult to show a clear recovery in domestic demand as well as export sluggishness next year, leading some foreign investment banks (IBs) to forecast South Korea's economic growth rate to be in the 1% range. They assessed that even if domestic demand gradually recovers, the recovery will not be strong enough to offset the export slump, resulting in economic growth in the 1% range next year. Although the need for the Bank of Korea to cut the base interest rate to compensate for the sluggish growth has increased, the exchange rate rising to 1,400 won has put the Bank of Korea in a 'dilemma,' according to evaluations.

Cargo is stacked on a container ship docked at Busan Port. Photo by Jinhyung Kang aymsdream@

Domestic Demand Recovery Not Strong Enough to Offset Export Slump

IBs that forecast next year's economic growth rate in the 1% range judged that the domestic demand recovery will not be strong enough to offset the export slump.

Kwon Hyo-seong, Chief Economist at Bloomberg Korea, who forecast a 1.9% economic growth rate before Trump's election, said, "This year was a year of exports, but looking at the situation in October and November, exports are slowing down faster than expected," adding, "Initially, we projected next year's growth rate to be in the low 2% range, but exports are rapidly slowing, domestic demand momentum does not seem strong, and external uncertainties are increasing, so we are lowering our forecast compared to the initial projection."

Kim Jin-wook, Chief Economist at Korea Citibank, who forecast a 1.8% economic growth rate next year, said, "The slowdown in export growth centered on semiconductors and the prolonged domestic demand slump, such as construction investment, are key factors for the 1% range forecast," adding, "Next year, private consumption and facility investment growth rates will improve somewhat compared to this year, but construction investment contraction will continue, and differentiation among domestic demand sectors is expected during the year."

Park Seok-gil, Chief Economist at JP Morgan, forecast a 1.7% economic growth rate next year, stating, "This year, net exports (net external demand) drove overall growth, while domestic demand (domestic demand) was weak due to sluggish private consumption and construction investment." He added, "Next year, the relationship between these two will shift; domestic demand will recover moderately, while net exports will face headwinds and growth will slow. I believe the strength of domestic demand recovery will not be enough to offset the export slump."

Economic Growth Forecast Lowered After Trump's Election

IBs stated that they lowered South Korea's economic growth forecast for next year after the inauguration of Trump's second administration.

Chief Economist Park said, "With former President Donald Trump winning re-election, next year's South Korean economic growth forecast was lowered by 0.1 percentage points from 1.8% before the election to 1.7% after the election," explaining, "Since the Trump administration's tariff policies could affect China's production in the short term, China's economic growth forecast was lowered from 4.6% to 3.9%, and South Korea's growth forecast was adjusted accordingly."

Chief Economist Kim expressed concern, saying, "If the Trump administration imposes universal tariffs of 10-20% and 60% tariffs on China, and South Korea fails to obtain tariff exemptions through negotiations, growth could decline further."

Growth Falling to 1% Range Could Fall Below Potential Growth Rate... Deflation Concerns Rise

IBs warned that if growth falls to the 1% range, the GDP gap could turn negative, increasing deflation concerns.

Chief Economist Park said, "If economic growth falls to the 1% range and falls below the potential growth rate (2%), the negative gap of GDP (real GDP - potential GDP) could widen," adding, "This could affect policy responses such as monetary and fiscal policies."

Chief Economist Kwon said, "A growth rate falling to the potential growth rate level means increased difficulties in domestic demand, such as for self-employed businesses," expressing concern, "The weak export recovery expected next year will act as an obstacle to domestic demand recovery."

Chief Economist Kim warned, "If South Korea's economic growth rate remains stuck in the high 1% range in the medium to long term, the potential growth rate could gradually fall below 2%."

Earlier Interest Rate Cuts Possible if Growth Falls Below Forecast

If next year's economic growth falls below expectations, the Bank of Korea may accelerate interest rate cuts to compensate for the sluggishness. However, some evaluate that with the exchange rate recently rising to 1,400 won, further rate cuts by the Bank of Korea may not be easy.

Following President Trump's re-election, the three major U.S. stock indices in New York have been hitting record highs day after day. Meanwhile, on the 12th, the domestic stock market opened slightly lower, with both the KOSPI and KOSDAQ declining. The won-dollar exchange rate rose, surpassing 1,400 won.

Chief Economist Kim said, "Considering the future economic growth slowdown, the downward trend in core inflation, and the diminishing effect of monetary policy stimulus, the Bank of Korea's rate cut pace could accelerate," but added, "However, since market loan rates have already sharply fallen preemptively this year and Seoul real estate prices have risen, the monetary policy's stimulus effect has already been preemptively applied, so even if the Bank of Korea cuts rates later, the stimulus effect will be considerably limited compared to the past."

Chief Economist Park said, "With third-quarter growth falling short of expectations, we revised our forecast from two additional rate cuts next year to three," adding, "If growth continues to fall short of expectations, the room for rate cuts could increase."

He added, "However, considering both inflation and financial stability, there remains considerable uncertainty about the optimal rate cut magnitude."

Researcher Kim Ho-jung at Yuanta Securities said, "Interest rates need to be cut for domestic demand, but since the exchange rate is not stabilizing, the Bank of Korea is in a dilemma," adding, "If only the won were weak, it would be a problem, but since all major countries except the U.S. are experiencing currency weakness, the Bank of Korea might decide assuming the exchange rate as a constant."

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