"Bank of Korea Economic Outlook: Q1 Growth Rate Expected to Reach Only 0.2%"

The Bank of Korea significantly lowered its economic growth forecast for South Korea this year to 1.5%, primarily due to concerns over uncertainties in U.S. tariff policies. The ongoing issue was reflected in the forecast based on the assumption that "the U.S. will impose certain tariffs on major trade deficit countries, including South Korea, within this year," considering an earlier implementation than previously expected. Political uncertainties were assumed to continue through the first quarter and gradually ease from the second quarter onward. This is the background for the forecast that the growth rate in the first quarter will be only 0.2% compared to the previous quarter.

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On the 25th, the Bank of Korea announced in its 'February Economic Outlook' that it would sharply revise down this year's economic growth forecast from 1.9% (previously in November last year) to 1.5%. The analysis pointed to increased downward pressure on both exports and domestic demand due to U.S. tariff policies and political uncertainties.

The figure of 1.5% was derived based on the 'basic scenario' that ▲ the U.S. will impose certain tariffs on major trade deficit countries within this year ▲ tariff imposition will occur earlier and with a wider increase than expected in November last year ▲ uncertainty in the trade environment will also increase. More specifically, the U.S. is assumed to have imposed tariffs on China from the first quarter and maintain them, impose tariffs on other countries within this year, and ease them next year. Retaliatory tariffs are assumed to be implemented at a low intensity, and trade policy uncertainties are expected to ease from next year. Regarding domestic political uncertainty, it is assumed that uncertainty will continue until the first quarter and gradually ease from the second quarter, with economic sentiment recovering to previous levels in the second half of the year.

Under these assumptions, the Bank of Korea expects the growth rate in the first quarter to be only 0.2% compared to the previous quarter. The forecast is lower than the initial expectation of 0.5% due to psychological contraction caused by the announcement of U.S. tariff policies, political uncertainty, weather, and other temporary factors. From the second quarter onward, as political uncertainty gradually eases and financial conditions ease, domestic demand is expected to recover moderately. Accordingly, growth of 0.8% in the first half and 2.2% in the second half is anticipated. On the other hand, exports are expected to face increasing downward pressure toward the end of the year due to worsening trade conditions. The launch of Samsung Electronics Galaxy S25, the reduction of individual consumption tax on automobiles in the first half, and the government's rapid execution of fiscal spending are seen as growth factors in the first quarter. Next year, despite uncertainties surrounding the trade environment, domestic demand is expected to recover, leading to a higher growth rate of 1.8% than this year.

The Bank of Korea forecasts this year's private consumption growth rate at 1.4% and facility investment growth rate at 2.6%. Compared to the November forecast last year, private consumption was lowered by 0.6 percentage points and facility investment by 0.4 percentage points. Construction investment was significantly revised down from -1.3% to -2.8%. Goods exports were adjusted from 1.5% to 0.9%, and goods imports from 1.9% to 1.1%.

Under an optimistic scenario where trade conflicts ease early, this year's growth forecast rises to 1.6%. If the U.S. imposes lower tariffs than the basic scenario on countries other than China this year and gradually reduces tariff rates through negotiations next year, domestic growth is expected to be 0.1 percentage points higher this year and 0.3 percentage points higher next year compared to the basic forecast. Applying this scenario to the current forecast means growth of 1.6% this year and 2.1% next year is possible.

Conversely, if the situation turns pessimistic, the growth rate could fall to as low as 1.4% this year. The Bank of Korea stated, "This assumes a scenario where trade conflicts intensify, the U.S. and other countries impose large-scale retaliatory tariffs within this year, maintain high tariffs thereafter, and uncertainty in the trade environment expands." In this case, growth is expected to be 0.1 percentage points lower this year and 0.4 percentage points lower next year compared to the basic forecast.

This year's consumer price inflation rate is forecast at 1.9%, unchanged from the November forecast, as upward factors from the won-dollar exchange rate increase are offset by downward factors such as low demand pressure and government price stabilization measures. The core inflation rate forecast was lowered by 0.1 percentage points from 1.9% to 1.8% this year.

Consumer price inflation rose slightly at the beginning of the year but is expected to gradually slow due to low demand pressure and base effects from last year's high agricultural prices, moving near the target level (2.0%). The consumer price inflation rate in January was 2.2%, rising mainly due to petroleum prices amid increases in exchange rates and international oil prices. Core inflation also rose slightly to 1.9%.

The current account surplus is expected to fall short of the initial forecast of $80 billion this year, reaching $75 billion due to worsening trade conditions. The goods balance is expected to shrink compared to the previous forecast as export growth slows due to the faster-than-expected implementation of U.S. tariff policies. The services balance is expected to see a slight reduction in deficit, mainly in travel, due to a decline in overseas consumption by Koreans amid exchange rate increases.

The increase in the number of employed persons is forecast to decrease from 160,000 last year to 100,000 this year. The Bank of Korea expects employment in manufacturing to remain sluggish, with employment in construction and face-to-face service sectors worsening due to construction investment contraction and delayed domestic demand recovery. However, the expansion of government job projects and solid growth in health and welfare sectors are expected to limit the extent of employment slowdown.

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