Worse Than Expected... Bank of Korea Projects 1.5% Economic Growth Rate This Year (Update)

Next Year’s Economic Growth Rate Maintained at 1.8%
Inflation Forecast Kept at 1.9% for Both This Year and Next

The Bank of Korea has lowered its economic growth forecast for South Korea this year to 1.5%, signaling a slowdown in the economy.

This is 0.4 percentage points lower than the 1.9% forecast released last November and also below the 1.6?1.7% forecast presented in January as a mid-term review following the December 3 emergency measures. Amid growing concerns that domestic and external uncertainties could dampen growth, the Bank of Korea’s revision reflects its increasingly cautious outlook on the Korean economy this year.

In the revised economic outlook announced on the 25th, the Bank of Korea projected that the South Korean economy will grow by 1.5% this year. Previously, the Bank had lowered its growth forecast from 2.1% in August to 1.9% last November, and now it has further revised it downward within three months. The figure of '1.5%' is lower than the projections of the Organisation for Economic Co-operation and Development (OECD·2.1%) and the International Monetary Fund (IMF·2.0%), and even more conservative than the recent downward revision by the Korea Development Institute (KDI·1.6%).

The 1.6?1.7% growth rate forecast in last month’s mid-term review only reflected the impact of political instability such as the emergency measures and impeachment. The supplementary budget (chugyeong) was not factored in. Since the scale and timing of the supplementary budget have not been concretized, it is believed that it was not included in this forecast either. The fact that the Bank of Korea lowered its growth forecast further within a month under the same conditions indicates that it views the Korean economic situation as more severe than expected.

The Bank of Korea’s further downward revision of the growth forecast signifies the considerable domestic and external uncertainties surrounding the South Korean economy this year. Both domestic demand and exports, which drive the Korean economy, are performing worse than expected, which is the biggest concern. In domestic demand, the sluggish construction investment that eroded South Korea’s economic growth last year continues, and private consumption recovery has been delayed since the emergency measures. Even the export performance, which has been supporting the Korean economy, is expected to slow down this year except for semiconductors.

Political uncertainty at home and the ongoing tariff war triggered by the second Trump administration in the United States are also interpreted as reasons for the conservative growth forecast. In last month’s mid-term review, the Bank of Korea explained, "Depending on three conditions?the timing of resolution of domestic political uncertainty, the timing and scale of additional government stimulus measures, and the economic policy direction of the new U.S. administration?the February forecast could be lowered further." This can also be interpreted as meaning that if domestic political instability continues beyond the second quarter of this year and the Trump administration’s tariff pressures directly impact the Korean economy, the growth rate could decline further.

The Bank of Korea maintained its economic growth forecast for next year at 1.8%, as projected last November. If this forecast materializes, the Korean economy will fall below or barely reach the potential growth rate (2%) for the fourth consecutive year, following 2023 (1.4%) and last year (2.0%). This implies that it will be difficult to see the same growth momentum as in the past. Analysts suggest that without finding clear new growth engines amid worsening aging and low birth rates, a decline in potential growth rate is inevitable.

The consumer price inflation forecast for this year remains at 1.9%. In January this year, the consumer price inflation rate was 2.2%, rising from 1.9% the previous month due to sustained high exchange rates and rising international oil prices. However, the Bank of Korea expects inflation to gradually stabilize downward in the second half of the year, falling below the Bank’s inflation target of 2.0%. Kim Woong, Deputy Governor of the Bank of Korea, said at the inflation situation review meeting on the 5th, "Consumer price inflation is expected to slow down for a while due to the base effects of petroleum and agricultural product prices and low demand pressure," adding, "It is expected to stabilize near the target level thereafter."

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