Bank of Korea Confirms '0% Range Growth'... Double Blow from Exports and Domestic Demand (Update)

This Year's Economic Growth Forecast Slashed from 1.5% to 0.8% in Just Three Months
Next Year's Growth Outlook Also Lowered to 1.6%
Inflation Forecast Maintained at 1.9% for This Year...
Adjusted Down to 1.8% for Next Year

The Bank of Korea has sharply lowered its economic growth forecast for South Korea this year to 0.8%.

This is a drastic reduction from the 1.5% forecast released in February, effectively halving the projection in just three months. Both exports and domestic demand, which drive the South Korean economy, are restricting growth, and it is interpreted as a sign that finding a rebound momentum will be difficult.

In its revised economic outlook announced on May 29, the Bank of Korea projected that the South Korean economy would grow by 0.8% this year. The '2025 growth rate' forecast has been continuously revised downward. It was lowered from 2.1% in August last year to 1.9% in November, and then further down to 1.5% in February this year. This time, the forecast was cut by another 0.7 percentage points in just three months.

The 0.8% figure is similar to the 0.8% forecast released by the Korea Development Institute (KDI) this month, and is more conservative than the International Monetary Fund (IMF)'s 1.0% projection last month. Both KDI and the IMF have also lowered their growth forecasts for South Korea by 0.8 percentage points and 1.0 percentage points, respectively.

The downward revision of the Bank of Korea's growth outlook had already been anticipated. After announcing a freeze in the benchmark interest rate last month, Governor Rhee Changyong indicated at a press conference that the February forecast had been overly optimistic and suggested a significant downward adjustment was likely. Subsequently, as the first-quarter economic growth rate recorded -0.246%, signaling negative growth, expectations grew that the adjustment could be even more drastic than initially expected.

The Bank of Korea's decision to halve its forecast in just three months is due to the deterioration of both domestic demand and exports compared to February.

In exports, the impact of U.S. tariff hikes is now evident in concrete figures. As of May 20, total exports stood at $32 billion based on customs clearance, a 2.4% decrease compared to the same period last year. This marks a reversal from last month's 3.7% increase to a decline this month. In particular, exports to the United States, which fell by 10.6% last month, have seen the rate of decline widen to 14.6% this month. Among export items, automobile exports to the U.S.?which have been subject to a 25% tariff?have been hit especially hard since April. After turning negative last month, they have continued to decline this month, down 6.3% year-on-year.

On the domestic front, sluggish construction investment, which dragged down South Korea's economic growth last year, continues. Private consumption, especially in services such as accommodation and food, is also recovering only slowly. With corporate investment sentiment weakened, the domestic economic slowdown is accelerating.

The outlook for improvement in the second half of the year is not optimistic. While domestic demand may partially recover as the business sentiment index improves, the prevailing view is that exports will deteriorate further. This is because pre-ordered shipments made before the implementation of tariffs from February to April are likely to drop out starting in the second half, which could have a negative impact on exports. The Korea Institute for Industrial Economics and Trade forecasts that South Korea’s annual export value will decrease by 1.9% this year, with a 1.4% decline in the first half and a 2.4% decline in the second half, indicating that exports will be even weaker in the latter half of the year.

Ultimately, the Bank of Korea’s sharp downward revision of the growth forecast reflects the view that, even after the negative growth in the first quarter, there is no clear momentum for a rebound in the South Korean economy this year. The diagnosis reflects a compound crisis both domestically and externally, as sluggish exports are now compounded by weak domestic demand. Kang Sungjin, professor of economics at Korea University, said, "Given the industrial structure's reliance on manufacturing exports, the impact of tariffs is inevitably greater than in other countries. Although the previous forecast took tariff shocks into account, the impact has now become more direct. Domestic demand is also likely to head toward stagnation. Neither domestic demand nor exports show any signs of improvement."

Lee Yoonsu, professor of economics at Sogang University, also commented, "Given the negative growth in the first quarter, even if the economy recovers in the second to fourth quarters, it will be difficult for the annual figure to exceed 1%. The fact that the forecast has dropped to the 0% range suggests that sectors like construction investment within both trade and domestic demand are in particularly poor condition."

The growth forecast for next year has also been revised downward to 1.6%. While this is expected to be a slight recovery compared to this year, it is still projected to fall below the potential growth rate of 2.0%. Following 1.4% in 2023 and 2.0% last year, this marks the fourth consecutive year of low growth.

The consumer price inflation forecast for this year remains unchanged at 1.9%. In April, the consumer price inflation rate was 2.1%, and the Bank of Korea expects it to hover around 2% for the time being, as both upward and downward factors coexist. Kim Woong, Deputy Governor of the Bank of Korea, said at a price monitoring meeting on May 2, "While prices are generally stable, uncertainties have increased due to factors such as U.S. tariff policies." The inflation forecast for next year has been revised downward by 0.1 percentage points to 1.8%, compared to the previous forecast of 1.9%.

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