The Bank of Korea's Monetary Policy Committee revised its economic growth forecast for this year from 0.8% to 0.9%. Although the forecast was raised due to the implementation of the supplementary budget and improved consumer sentiment, concerns remain that uncertainty from tariff negotiations initiated by the United States continues to hinder our economy.
The Bank of Korea forecasted on the 28th that Korea's economy will grow by 0.9% this year. This is an increase of 0.1 percentage points from the previous forecast in May (0.8%).
The Bank of Korea diagnosed that "the domestic economic situation has improved as exports, particularly in semiconductors, have increased more than expected." Semiconductor exports surged by 16.3% compared to the previous year based on the second quarter figures. Although exports are expected to show a positive trend for the time being, the Bank explained that the impact of tariff implementation by the United States is likely to gradually slow down, resulting in only a 0.1 percentage point increase in the economic growth forecast.
The Bank of Korea also cited the recovery of domestic demand as a factor in raising its forecast. The Bank stated, "In the future, domestic demand will continue to show gradual recovery due to the supplementary budget and improved consumer sentiment." They predict an economic growth rate of 1.1% for the third quarter. Lee Ji-ho, Director of the Bank's Research Department, explained, "The third quarter growth rate is very high," pointing to effects from the people's livelihood recovery consumption coupons and improved consumer sentiment.
At the end of last month, the United States and South Korea agreed to reduce mutual tariffs from the existing 25% to 15% through negotiations. In this regard, the Bank of Korea said, "As export costs to the United States rise due to tariffs and total demand falls due to inflation in the U.S., exports to the U.S. will greatly decrease," adding, "Industries heavily impacted will include metals and machinery, which face high tariffs, as well as automobiles with a significant share of exports to the U.S."
The Bank of Korea maintained its economic growth forecast for next year at 1.6%, the same as its prediction in May. However, it noted that the tariff policies from the United States could exert greater pressure on growth and prices next year. The Bank estimated that this year's tariffs have lowered the Gross Domestic Product (GDP) growth rate by 0.45 percentage points, expecting this effect to increase to 0.60 percentage points next year.
The Bank of Korea stated, "Next year, the extent of export slowdown will widen, leading to greater negative growth effects," explaining that the delayed impact of tariffs is expected to become visible, and that additional product tariffs (on semiconductors and pharmaceuticals) will come into effect next year.
The uncertainty surrounding tariffs is also one of the downward factors for our GDP. The Bank of Korea noted, "Depending on the pattern of negotiations with countries such as China, Canada, and Mexico, where product tariffs have not yet been announced, the extent of uncertainty and its impact may vary."
The Bank predicts that if the United States completes discussions smoothly with the countries involved in tariff negotiations, domestic growth next year could be higher by 0.1 percentage points than the previous forecast. Conversely, if negotiations break down and trade conflicts reignite, domestic growth next year could decrease by 0.2 percentage points.
The Bank of Korea projected that this year's consumer prices will rise by 2.0%, while core inflation, excluding food and energy, will rise by 1.9%. Compared to the forecast in May, the consumer price increase forecast has been revised up by 0.1 percentage points. The Bank explained, "Despite the decline in international oil prices, the forecast has slightly increased compared to May due to the rise in prices of agricultural, livestock, and fishery products." The core inflation rate is the same as the forecast in May.
In July, the consumer price increase rate was 2.1%, marking a decrease of 0.1 percentage points from the previous month as oil prices fell (0.3% to -1.07%).
The Bank of Korea estimates that the current account surplus will reach $110 billion this year and $85 billion next year. This is significantly higher than the previous forecast made in May ($82 billion this year and $72 billion next year). If the Bank's predictions are correct, this year's current account surplus will be the largest ever. The Bank added, "This year's merchandise trade surplus is expected to exceed last year's level as the impact of U.S. tariffs manifests gradually."
The increase in the number of employed persons is expected to be 170,000, which is 50,000 more than the forecast in May. The forecast for next year is similarly an increase of 30,000, reaching 130,000. The Bank noted, "Although the decrease in employment in construction and manufacturing persists, the increase in the service sector will significantly exceed initial projections due to government job policies and improved consumption," adding, "The elderly will lead the increase in employment."