The government has formalized this year's economic growth rate at 0.9%. Excluding the year 2020, when the COVID-19 pandemic occurred (-0.7%), this is the lowest level since the global financial crisis in 2009 (0.8%). There is an analysis that low growth is inevitable due to the slowdown in exports caused by U.S. tariffs. Since the high tariffs expected on major export items such as semiconductors have not been reflected in the outlook, additional downside risks remain.
This year, expectations are that consumption will recover due to the execution of approximately 30 trillion won in supplementary budgets in two rounds, but the growth rate enhancement effect from this is expected to be limited to an annual 0.1 percentage point.
◇ This year's growth rate forecast, cut in half for the first time in 8 months
The government projected the real Gross Domestic Product (GDP) growth rate for this year at 0.9% in the 'new government economic growth strategy' announced on the 22nd. This is a downward adjustment of 0.9 percentage points from the 1.8% proposed in early economic policy directions.
This forecast is at a similar level to those presented by major domestic and international institutions. It is higher than the projections from the Bank of Korea, Korea Development Institute (KDI), International Monetary Fund (IMF), and Asian Development Bank (ADB) (0.8%), but lower than the projections from the Organization for Economic Cooperation and Development (OECD) (1.0%). The average forecast from eight major foreign investment banks was also 1.0%.
A government official noted, 'Since the performance in the first quarter (-0.246%) was particularly bad, achieving 1% growth this year would require mid-1% growth in the second half.' He added, 'Achieving growth of around 0.9% is not an easy task.' The government expects next year's growth rate to be 1.8%.
The background for significantly lowering this year's growth rate forecast is poor exports. According to the Bank of Korea, last year's annual export value, based on customs clearance, was $683.69 billion, an increase of 8.1% compared to the previous year. Just last January, the government predicted an export growth rate of 1.5%, but has now lowered that to 0.2%.
Already, the export value for the first half of this year was recorded at $334.72 billion, similar to last year's level. Exports of semiconductors ($74.1 billion, 11.1%) and ships ($13.27 billion, 18.8%) have continued to grow, while exports of automobiles ($34.93 billion, -2.1%), steel products ($23.2 billion, -3.2%), and petroleum products ($21.72 billion, -18.5%) have worsened.
In particular, the fact that the U.S. has hinted at a 100% tariff on semiconductors, which are Korea's key export items, is also expected to become a variable. This has not yet been reflected in the government's forecasts.
A government official noted, 'Future trends are expected to slow, particularly for automobiles and steel, which will be subject to U.S. tariffs.' He added, 'Despite significant easing of export uncertainty recently due to tariff negotiations concluded at the end of last month, risks such as tariffs on semiconductors and pharmaceuticals still persist.'
However, for the current account, a surplus of $95 billion is expected due to improved performance in the first half and a reduction in import costs due to falling oil prices, which is larger than the initial forecast of $80 billion.
◇ Hope on 'consumption,' but the growth rate enhancement effect of the supplementary budget is merely 0.1 percentage points
The government is pinning hopes on domestic consumption. Since the sentiment has improved following the inauguration of Lee Jae-myung's government, the sluggish private consumption trend has reversed since the second quarter, and there are expectations that a recovery centered on domestic consumption will continue once the supplementary budget is fully executed.
The government's expected growth rate for private consumption this year is 1.3%. This figure takes into account the effects of the supplementary budget and interest rate cuts but is 0.5 percentage points lower than previous projections. Factors such as the cumulative effects of persistently high inflation and household debt burdens are cited as constraints. It is estimated that the supplementary budget will raise the economic growth rate by 0.1 percentage points each this year and next.
The sluggish construction industry is also hindering economic recovery. The government predicts that construction investment will decline by 8.2% this year, a decrease of nearly 7 percentage points from the January forecast of -1.3%. Another pillar of domestic demand, the growth rate for equipment investment is also expected to be lowered by 0.9 percentage points to 2% from previous projections.
However, employment and inflation are expected to remain relatively healthy. The forecast for the employment rate this year is 62.8%, which is 0.1 percentage points higher than last year's rate. The number of employed persons is expected to increase by 170,000. In fact, from the beginning of this year until July, the number has already increased by 180,000. The forecast for inflation is set at 2.0%, in line with the price stability target.
A government official noted, 'We will enhance economic and livelihood vitality to ensure the recovery trend that has been difficult to revive expands and solidifies,' and added, 'We will manage the macroeconomy stably while responding to changes in the trade environment.'