The Bank of Korea projected this year's South Korea's gross domestic product (GDP) growth rate to be 1.5%. This figure is below last November's forecast of 1.9% and the mid-January estimate of 1.6% to 1.7%. However, the growth rate projection for next year was maintained at the previous estimate of 1.8%.
The consumer price index growth rate was set at 1.9% for both this year and next year. The Bank of Korea noted that the inflation rate would hover around the target level (2.0%) due to the base effect from last year's soaring agricultural prices combined with low demand pressure from sluggish domestic consumption.
◇ This year's growth rate is 1.5%, the lowest among domestic and foreign institutions' forecasts
The growth rate projection provided by the Bank of Korea was the lowest among estimates from domestic and foreign institutions. According to external institutions, the International Monetary Fund (IMF) had the highest estimate at 2.1%, followed by the Organisation for Economic Co-operation and Development (OECD) at 2.0%, and the Korea Development Institute (KDI) at 1.6%. The government forecast was 1.8%.
The Bank of Korea lowered the growth rate projection due to increased downward pressure on domestic demand following economic sentiment deterioration after the imposition of a state of emergency at the end of last year.
According to the Bank of Korea, this year's private consumption growth rate is expected to be 1.4%, slightly higher than last year's (1.1%). This is a reduction of 0.6 percentage points from the anticipated 2.0% in November. Private consumption is expected to continue sluggish for the time being, but to gradually improve as sentiment recovers and the impact of interest rate cuts is felt.
Exports have also been downwardly adjusted. The Bank of Korea forecasts this year's export growth rate to be 0.9%, lower than the previous projection of 1.5% by 0.6 percentage points. The information technology (IT) sector is expected to continue its growth in exports, but a decline is expected in the non-IT sector, leading to a downward revision in growth rates. IT items are projected to see an increase, primarily in high-performance semiconductors (including HBM), while the non-IT items are expected to decline, particularly in petroleum products, chemical products, and steel metals.
Construction and facility investment forecasts were also significantly downwardly revised. This year's construction investment growth rate was revised down by 1.5 percentage points to -2.8%, while the facility investment growth rate was estimated to be 2.6%, down 0.4 percentage points. Due to the impact of a reduction in orders and construction starts, construction investment is expected to remain sluggish, continuing from last year, and facility investment is expected to show mild growth, primarily driven by semiconductor equipment, but rising uncertainties in major countries' trade policies are expected to limit the growth.
The Bank of Korea said, "As political uncertainties are gradually resolved and the effects of easing financial conditions begin to emerge, domestic consumption is expected to recover gradually," but noted that "the recent U.S. government's tariff policies are being implemented more aggressively than expected, which is deemed likely to constrain the growth trajectory of our economy."
◇ Inflation rates for this year and next year maintained at 1.9%... current account surplus shrinks
The Bank of Korea projected this year's inflation rate to remain at 1.9%, the same as last November. This is a lower level compared to last month's consumer price inflation rate of 2.2%. The Bank of Korea noted that while oil prices rose due to the influence of currency exchange rates and international oil prices, the surge in agricultural prices last year was expected to moderate due to the government's supply stabilization measures and base effects, allowing for overall stability in inflation.
The core inflation growth rate was presented at 1.8%, down 0.1 percentage points from before. The Bank of Korea explained that the upward pressure on core prices, centering on durable goods, has weakened due to a slowdown in domestic recovery. Government policies aimed at minimizing public utility fee increases and enhancing price stability are also expected to exert downward pressure.
The current account is projected to experience a reduction in surplus scale compared to last year due to recent worsened trade conditions. The Bank of Korea estimated this year's current account to be $75 billion, 5 billion lower than the previous forecast. The Bank of Korea commented that "as the increase in customs export slows due to the unexpectedly swift U.S. tariff policy implementation, the surplus in the goods account is expected to decrease compared to last year, while the deficit in the service account is anticipated to slightly expand due to a deterioration in transport trade resulting from reduced trade."
The increase in the number of employed people is expected to be 100,000 this year, down 30,000 from the previous forecast. Thanks to the government's job support initiatives, employment among the elderly and women is expected to rise, but job losses are anticipated to continue, particularly in the construction, retail, and manufacturing sectors. The unemployment rate is expected to remain at 2.9%, the same as before, while the employment rate is projected to decline slightly to 62.7%.
◇ U.S. tariff level is a variable… if weakened, growth at 1.6%, if strengthened, growth at 1.4%
The Bank of Korea analyzed that future growth rates and inflation could vary depending on the unfolding of global trade conflicts. If the U.S. imposes lower-than-expected tariffs on countries excluding China this year and gradually lowers tariffs through negotiations next year, it is expected to increase this year's economic growth by 0.1 percentage points and next year's growth by 0.3 percentage points. However, regarding the inflation rate, it is estimated to remain unchanged this year and to rise by 0.2 percentage points next year.
On the other hand, if the U.S. and other countries impose large tariffs under mutual retaliation this year and maintain high tariffs afterward, uncertainties in the trade environment will expand, consequently leading to a downward adjustment of the growth rate. In this case, the Bank of Korea forecasts this year's economic growth rate to be 0.1 percentage points lower than the basic forecast. The inflation rate is expected to remain unchanged this year, but to decrease by 0.3 percentage points next year.
Quarterly growth rates (compared to the previous quarter) are expected to be ▲0.2% in Q1 of this year ▲0.8% in Q2 ▲0.7% in Q3 ▲0.5% in Q4. Inflation rates (compared to the same period last year) are projected at ▲2.1% in Q1 of this year ▲1.9% in Q2 ▲1.9% in Q3 ▲2.0% in Q4.