[Q&A] Bank of Korea: "Mid-1% Growth Is Not a Recession... Growth Momentum Has Weakened"

Bank of Korea Lowers Growth Forecast to 1.5%
Says "Mid-1% Is Not a Recession"
Growth Momentum Seen Weak Amid Political Uncertainty and Tariff Pressures
Supplementary Budget Could Raise Outlook If Implemented

The Bank of Korea stated on the 25th that it does not view the downward adjustment of this year's economic growth forecast to 1.5% as an indication of an economic recession.

Kim Woong, Deputy Governor, is speaking at the Bank of Korea's economic outlook briefing in February. Provided by the Bank of Korea.

Woong Kim, Deputy Governor of the Bank of Korea, said at the "February Economic Outlook Briefing" held that afternoon, "Compared to the potential growth rate (2%), last year was at a zero level and this year is expected to show a negative figure," adding, "If you ask whether a mid-1% level should be considered a recession, I don't think that's the case."

He explained, "The trend line of the potential growth rate, which can be used as a benchmark, is itself declining. From 2024 to 2026, the potential growth rate is 2%, but for the following three to four years, it is on a downward trend to 1.8%. However, I do not believe this should be viewed as a recession." Jiho Lee, Director of the Research Department, also said, "With our national income level at $33,000 to $35,000, a growth rate of around 1.5% is generally not considered a recession. Rather, it seems more balanced to view the drop in growth momentum as stemming from political uncertainty and tariff pressures originating from Trump."

Deputy Governor Kim stated, "According to scenario analyses on the development of global trade conflicts, if global trade tensions are alleviated early through smooth negotiations between the US and other countries, this year's growth rate could be 0.1 percentage points higher, and next year's could be 0.3 percentage points higher. On the other hand, if trade conflicts intensify and high tariffs are imposed, growth could be 0.1 percentage points lower this year and 0.4 percentage points lower next year."

He continued, "This year, the domestic economy is expected to see a much lower growth rate compared to last year due to deteriorating economic conditions both at home and abroad. However, the economic sentiment index is gradually improving, and the effects of the past three interest rate cuts are starting to appear, so we expect the growth trend to gradually improve going forward."

Economic Outlook Briefing held on the afternoon of the 25th at the Bank of Korea in Jung-gu, Seoul. (From left) Kyunghoon Park, Head of Model Forecasting Team; Gaguk, Head of Inflation Trends Team; Jiho Lee, Director of Research Department; Woong Kim, Deputy Governor; Changhyun Park, Head of General Research Team; Jaemin Baek, Head of International Trade Team; Sejun Park, Head of International Comprehensive Team. Provided by the Bank of Korea.

The following is a Q&A session.

- In the scenario analysis by tariff policy, the basic assumption is that tariffs will be eased next year. Was this based on the judgment that, considering the negative impact on the global and US economies, a tariff reduction next year is inevitable? Conversely, why does the pessimistic scenario assume tariffs will be maintained next year?

▲For other countries, we assumed that tariffs would rise during this year and then gradually fall next year due to negotiations. In the pessimistic scenario, we assumed that the currently announced tariffs would escalate throughout this year. For example, the US imposes tariffs, China and Canada retaliate, then the US imposes tariffs again, and this escalation continues through the year, with the year-end level maintained into next year. In other words, since we assumed there would be no negotiations, we considered it a pessimistic scenario. In the baseline scenario, we assumed that tariffs would be imposed and maintained this year, but would be slightly reduced next year through gradual negotiations.

- In the quarterly outlook, the forecast for the second quarter was raised from 0.6% to 0.8%, and for the third quarter from 0.5% to 0.7%. Is this mainly due to a strong base effect in the first quarter, or is there also some effect from a recovery in domestic demand?

▲The growth rates are projected to be 0.2% in the first quarter, 0.8% in the second quarter, 0.7% in the third quarter, and 0.5% in the fourth quarter, all on a quarter-on-quarter basis. Compared to the growth outlook from last November, these are lower, so year-on-year, the level is quite low. The Korean economy has been growing at around 0% since the second quarter of last year. There was almost no growth, and although we expected a recovery in the fourth quarter, various political uncertainties led to a poor fourth quarter. We believe this impact will continue into the first quarter of this year. The upward revisions for the second and third quarters can be understood as a technical rebound from previously suppressed factors. The overall growth rate was projected at 1.9% last November, but now it has dropped sharply to 1.5%.

- Despite upward pressure on import prices, you have maintained a stable inflation outlook, attributing it to weak domestic demand. What is your outlook for domestic demand in the second half? If a recovery begins in the second half, wouldn't that create inflationary pressure?

▲In terms of contribution to growth, domestic demand was 0.2% last year and is expected to grow by 1.5% this year. However, even if domestic demand drives 1.5% growth in the second half, considering the potential growth rate (2.0%), it is still negative relative to GDP. Therefore, we do not expect it to stimulate inflation significantly. Additionally, the government's inflation stabilization measures are expected to act as a downward factor. The fuel tax cut has been extended until April, and the forecast also reflects the extension of the individual consumption tax cut and the expectation that public utility rate hikes will be lower than initially planned.

- Are there no scenario-based forecasts reflecting a supplementary budget (extra budget)?

▲There are three to four main assumptions in our economic outlook. We assumed that political uncertainty would continue through the first quarter and then recover from the second quarter onward. We also reflected a stronger impact from tariff policies than in last November's outlook, leading to a downward revision in exports. The supplementary budget was not included this time. However, if a supplementary budget of 15 to 20 trillion won is implemented, considering fiscal soundness, it could raise growth by 0.2 percentage points, but we did not assume that scenario. This is because the effect of a supplementary budget varies greatly depending on how it is used. If a supplementary budget is announced in the future, we will estimate the positive effect according to its content.

- Construction investment is forecast at -6.7% in the first half of this year. Are there additional downside risks?

▲Construction investment was worse than expected in the fourth quarter of last year, not only due to the impact of private construction but also because public construction investment did not proceed smoothly, and this was reflected in the outlook. Construction investment has been on a negative trend due to prolonged high interest rates, a sharp rise in construction costs after the COVID-19 pandemic, and real estate project financing (PF) insolvencies leading to a contraction in orders and groundbreaking. With these uncertainties reflected, the fourth quarter indicators were poor. This year, unfavorable weather conditions such as cold waves and heavy snow are expected to continue to weigh on the first half. However, in the second half, we expect a gradual improvement, reflecting the effects of interest rate cuts, improved construction orders since last year, and investment in finishing work and interior construction during the move-in process at Dunchon Jugong.

- It is said that consumption tends to increase during election seasons, boosting growth. Has the impact of an early presidential election been reflected in the outlook?

▲The higher growth rate in the first quarter of last year appears to have been partly due to the election. We believe it could have a slight positive effect in the second quarter this year as well. However, at this point, we have not assumed an election or reflected its effects in the outlook.

- This year's growth forecast was sharply lowered, and considering the base effect, there could be an upward adjustment. However, next year's growth forecast has not been revised. Are you taking a conservative view of the economy for next year as well? If the tariff issue is resolved, can growth return to the potential rate?

▲There can be various criteria for judging a recession or slowdown. Some may argue that even if there is no negative growth, a period without clear upward momentum should be considered a recession. However, compared to the potential growth rate, last year was at a zero level and this year is expected to be negative, so when asked if a mid-1% level should be seen as a recession, I don't think so. The potential growth rate or the benchmark trend line itself is declining. It is 2% until 2026, but will fall to 1.8% for the next three to four years. Therefore, we need to make structural reform efforts to raise our potential growth rate further.

▲With our national income level at $33,000 to $35,000, a growth rate of around 1.5% is generally not considered a recession. For example, Germany, with an income level of $40,000, experienced two consecutive years of negative growth. Rather, it seems more balanced to view the drop in growth momentum as stemming from political uncertainty and tariff pressures originating from Trump.

- If the supplementary budget was excluded from the growth forecast, should we expect a high probability of an upward revision in the future?

▲The supplementary budget is an upside factor in the growth forecast. Rapid stabilization of political uncertainty is also considered an upside factor. The effect of interest rate cuts could go either way, depending on how the accumulated effects play out. Although we have reflected tariff policies, if trade conflicts intensify even further, it could become a downside factor. For semiconductors, we assumed high-end products would remain strong and low-end products would remain weak, but this could also go either way depending on future developments. This growth forecast reflects most of the news available so far. If things deteriorate further from here, it would mean a fairly bad situation, but if we exclude other variables and only add the supplementary budget, the growth outlook could be revised upward.

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