The Bank of Korea projected that Korea's gross domestic product (GDP) growth rate will only reach 0.8% this year. This figure is nearly half of the previous forecast of 1.5% in February. Next year's growth rate was also reduced from the previous estimate of 1.8% to 1.6%.
This year, the consumer price index (CPI) growth rate is maintained at the previous forecast of 1.9%, while next year's forecast has been lowered from 1.9% to 1.8%. The increase in processed food and service prices is offset by the decline in international oil prices and low demand pressure, keeping the inflation rate near the target of 2.0%.
◇ IMF, growth rate below 1% following global financial crisis and COVID-19
In the past 30 years, Korea's economic growth rate fell below 1% only three times: during the International Monetary Fund (IMF) foreign exchange crisis in 1998 (-4.9%), the global financial crisis in 2009 (0.8%), and the COVID-19 pandemic in 2020 (-0.7%).
The gloomy outlook is not only from the Bank of Korea. On the 14th, the Korea Development Institute (KDI), a state-run research institute, also lowered its economic growth forecast for this year from 1.6% to 0.8%. The average growth forecast by eight foreign investment banks (Barclays, Bank of America, Citi, Goldman Sachs, JP Morgan, HSBC, Nomura, UBS) for Korea's economic growth rate also fell from 1.4% in March to 0.8% in April.
The Bank of Korea predicted that Korea's economy might falter due to delays in domestic demand recovery and the potential widening of export slowdowns due to the impact of U.S. tariffs.
According to the Bank of Korea, the private consumption growth rate is expected to reach only 1.1% this year, 0.3 percentage points lower than the February forecast of 1.4%. However, the Bank of Korea noted an improvement in private consumption this month, driven by increased consumption of face-to-face services such as dining out and leisure. The Bank of Korea expects that private consumption will recover as household income improves and the effect of interest rate cuts is realized.
The export growth rate forecast by the Bank of Korea has turned negative this year due to the strengthened U.S. tariff policy. The Bank of Korea anticipated that the export growth rate would record -0.1% this year, reduced by 1 percentage point from the previous forecast of 0.9%. Exports declined by 1.9% compared to the previous quarter in the first quarter as semiconductors weakened. Although recent exports have improved due to pre-demand (before tariff imposition) effects, the export growth rate is expected to decline with the increasing impact of U.S. tariffs in the future.
The outlooks for construction investment and facility investment have also been significantly downgraded. The Bank of Korea presented this year's construction investment growth rate as -6.1%, down by 3.3 percentage points from the previous figure. Facility investment growth is decreased by 0.8 percentage points to 1.8%. Construction investment is expected to improve slowly due to accumulated unsold homes in local areas and chronic vacancies in commercial real estate. Facility investment is likely to see reduced growth due to worsening business conditions and deepening downturns in the non-IT institutional sector.
The Bank of Korea said, "In the second half, domestic demand is expected to improve as economic sentiment recovers amid continued interest rate cuts and supplementary budget effects," and added, "Exports will still show a slowdown below the original forecast path due to high tariff rates and uncertainties in the tariff negotiation process."
◇ Inflation rate this year remains the same as previous forecast… Next year's forecast lowered by 0.1 percentage point
The Bank of Korea maintained the consumer price growth rate forecast at 1.9% as predicted in February this year. While prices of processed foods, dining out, and university tuition have risen, the decline in international oil prices offset the price increases of some goods and services. However, next year's consumer price growth rate was presented at 1.8%, 0.1 percentage points lower than the previous forecast.
The core inflation rate forecast by the Bank of Korea has been raised by 0.1 percentage points to 1.9% compared to the previous figure. Core inflation is an indicator excluding volatile food and energy prices.
The core inflation rate has slightly increased despite low demand pressure due to rising prices for some services. The expected inflation, which influences prices (general public's outlook on the inflation rate one year ahead), has remained at the upper 2% level since the second half of last year but fell to 2.6% this month. The long-term expected inflation by experts (for five years) is 1.8%.
The current account surplus is projected to be larger than the forecast in February ($75 billion), as imports will decrease more significantly than exports. The Bank of Korea forecast that this year's current account surplus would be $82 billion. The Bank of Korea predicts that although exports will decline due to the U.S. tariff impact, imports will decrease even more due to falling oil prices and weak domestic demand. Basic income balance, which reflects wages, dividends, and interest flows, is expected to increase as domestic overseas investment grows and dividend income rises.
The expected increase in the number of employed people is 120,000, which is 20,000 more than the February forecast. This is due to the increased possibility of new jobs in public administration and health and welfare sectors influenced by the government's employment policy. However, the overall employment situation is not good. Excluding public administration and health and welfare, private sector job numbers are decreasing, and low-wage, short-hour jobs in the public sector are driving employment growth. The unemployment rate and employment rate are projected to remain at 2.9% and 62.7%, respectively, similar to previous forecasts.
◇ Next year's growth rate is 1.6% due to domestic demand recovery... Scenarios based on tariff negotiations
The Bank of Korea viewed next year's economy positively, as domestic demand is expected to rebound from the first quarter's low point. They predict next year's economic growth rate will be 1.6%, which is 0.8 percentage points higher than this year's forecast.
The Bank of Korea believes that if negotiations with the United States and all countries proceed smoothly, leading to a significant reduction in tariff rates, the domestic growth rate will increase by 0.1 percentage points this year and 0.2 percentage points next year compared to the existing forecast. Even if tariff negotiations on inflation rates conclude positively, the impact this year will be limited, but next year it is estimated to increase by 0.1 percentage points compared to the previous forecast.
On the other hand, if conflicts between the United States and China reignite and tariff negotiations with other countries collapse, the growth rate will be revised down. The Bank of Korea expects that in this scenario, the economic growth rate this year will be 0.1 percentage points lower than the previous forecast, and 0.4 percentage points lower next year. In this case, the inflation rate is expected to remain unchanged this year but decline by 0.2 percentage points next year.
The quarter-on-quarter growth rate for the first quarter recorded -0.1% this year. The Bank of Korea predicts ▲2nd quarter at 0.4% ▲3rd quarter at 1.2% ▲4th quarter at 1.6%. The year-over-year inflation rate for the first quarter was 2.1% this year. The Bank of Korea expects this figure to be ▲2nd quarter at 2.1% ▲3rd quarter at 1.8% ▲4th quarter at 1.8%.