AMRO also "Significantly Downgrades South Korea's Economic Growth Rate to 1.6% This Year"

AMRO Releases Annual Consultation Report
Concerns Over Impact of U.S. Tariff Hikes... First Mention of Martial Law Situation
Growth Forecast Lowered by Another 0.3 Percentage Points in Just Three Months

The ASEAN+3 Macroeconomic Research Office (AMRO) forecasted that South Korea's economic growth rate will slow to 1.6% next year. It cited the semiconductor cycle slowdown, tariff increases triggered by Trump, and political uncertainty leading to weakened corporate and consumer sentiment as threats to the Korean economy. AMRO recommended continued interest rate cuts to revive domestic demand and efforts to rebuild fiscal capacity, which has deteriorated since the pandemic.

On the 21st, AMRO published the '2024 Korea Annual Consultation' report containing these findings. AMRO is an international organization analyzing the economies of ASEAN and Korea, China, and Japan. This report was prepared based on the results of the AMRO mission's visit to Korea in November last year, during which annual consultations were held with government ministries and related agencies such as the Ministry of Economy and Finance and the Bank of Korea.

AMRO projected South Korea's economic growth rate to be 1.6% this year. This is 0.3 percentage points lower than the 1.9% growth forecast presented in the first announcement in December last year, right after the annual consultation. AMRO cited the impact of U.S. tariffs as a reason for the downward revision. AMRO stated, "A sharp slowdown in growth in the U.S., Europe, or China would dampen global demand and affect South Korea's exports," adding, "The steep increase in U.S. import tariffs will also darken South Korea's export outlook."

AMRO also directly addressed the impact of domestic political instability following the emergency martial law situation on the economy. It pointed out, "Political uncertainty caused by the declaration of martial law in December last year may dampen corporate and consumer sentiment and act as an additional risk factor for short-term aggregate demand forecasts, as foreign investors and tourists adopt a wait-and-see attitude."

On the 11th, in front of the Constitutional Court in Jongno-gu, Seoul, the pro and anti-impeachment groups of President Yoon Seok-yeol stood facing each other, shouting their respective claims. Photo by Kang Jin-hyung

AMRO's outlook aligns with the views of domestic and international institutions that have lowered their growth forecasts by lowering expectations for the Korean economy. Earlier, the Organisation for Economic Co-operation and Development (OECD) also presented a 1.5% growth forecast in its mid-term economic outlook report released on the 17th, 0.6 percentage points lower than the previous forecast (2.1%) just three months ago, stating that Korea's economic growth this year will be more moderate than previously expected.

Major global institutions have also successively lowered their growth forecasts for the Korean economy this year to the mid-1% range. Last month, the Bank of Korea presented the same 1.5% forecast as the OECD, which was a further downward revision from the previous forecast of 1.9% (November) to 1.6?1.7% (January), reflecting the emergency martial law situation, and then lowered again within a month. The government and the Korea Development Institute (KDI) also recently lowered their forecasts to 1.8% and 1.6%, respectively. Next month, the Asian Development Bank (ADB) and the International Monetary Fund (IMF) will release their world economic outlooks, including for the Korean economy.

AMRO urged the Bank of Korea to implement additional interest rate cuts to revive domestic demand. AMRO noted, "Since inflation is expected to remain stable in the short term, it is appropriate to continuously ease monetary tightening policies to revive domestic demand." It projected the inflation rate to fall to 1.9%, down 0.4 percentage points from 2.3% last year. AMRO suggested, "While interest rate cuts may lead to an increase in household debt, they can alleviate the interest burden on existing household debtors and stimulate domestic demand," adding, "It can also help ease the financial conditions of developers, construction companies, and non-bank financial institutions related to project financing (PF) businesses with default concerns."

AMRO also diagnosed risks in the non-bank sector and recommended strengthening risk management and credit evaluation. It noted that the debt repayment capacity of small and medium-sized enterprises, small business owners, and self-employed individuals remains weak, and delinquency rates are rising in non-bank deposit institutions. In particular, it saw partial risk factors persisting in the savings bank sector, which holds a large portion of PF loans in the real estate sector. AMRO stated, "While maintaining the strict loan-to-value ratio applied to debtors holding multiple homes or properties in speculative areas, consideration should be given to normalizing the loan-to-value ratio for first-time homebuyers to support actual housing demand."

Regarding fiscal policy, AMRO emphasized, "It is important to rebuild fiscal capacity that has deteriorated since the pandemic." It further recommended, "Careful attention should be paid to a medium-term fiscal consolidation program to stabilize the debt-to-GDP ratio, and in the long term, it is essential to strengthen fiscal discipline while implementing revenue enhancement and expenditure efficiency measures."

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