"The second-quarter gross domestic product (GDP) growth rate was better than expected. Also, as issues related to Korea's political uncertainty that began in the fourth quarter of last year were resolved, consumer sentiment improved significantly. Reflecting the effects of the formulation and implementation of the supplementary budget, we slightly revised up this year's growth forecast."
Rahul Anand, Director General of the International Monetary Fund (IMF) Korea mission, on the 24th explained the background for raising Korea's 2025 growth forecast by 0.1 percentage point (p) to 0.9% from the previous 0.8%. The IMF Korea mission, represented by Director General Anand, briefed on the results of its annual consultation that day. The IMF dispatches country missions to review each nation's economic conditions. The Korea mission led by Anand visited from the 11th to the 24th and announced the results of consultations with various institutions at the Government Complex Seoul that day.
The mission presented this year's growth forecast for Korea at 0.9%. It raised the figure by 0.1 percentage point from the 0.8% projection in the World Economic Outlook released on Jul. 30. Next year's growth forecast for Korea was presented at 1.8%. That is the same as the previous forecast. However, it said uncertainty around the outlook is high, with risks tilted to the downside. There are many variables, including shifts in the global trade landscape, geopolitical conflicts, financial market volatility, and surges in global commodity prices.
The following is a full Q&A of Director General Anand's briefing.
―You revised this year's growth forecast for Korea. Explain the background.
"First, the second-quarter GDP growth rate performed better than we expected. I think the results reflected improved consumer sentiment as political uncertainty that began in the fourth quarter of last year was resolved. We believe this improvement in consumer sentiment will continue. Also, there were two supplementary budgets this year. One of them was announced and implemented after we issued our July outlook. Reflecting the effect of this supplementary budget, we slightly revised up this year's growth forecast."
―You presented next year's forecast at 1.8%. Should this be seen as a step up to a level twice this year's growth forecast, or as continued low growth still below the 2% potential growth rate?
"I think this is similar to the question of whether the glass is half full or half empty. A growth rate of 1.8% is, I think, a level converging toward the potential growth rate. It is a path approaching potential growth, and in the medium term the real gap could be closed. However, to achieve the government's target of 3% growth, structural reforms must be carried out. Structural reforms to boost productivity, labor market changes to respond to aging, and deepening and developing capital markets are needed."
―Even as you revised the forecast up, you said downside risks are large. What are the factors?
"Policy uncertainty related to global trade is very high. Also, geopolitical tensions could escalate further. That can affect exports and investment. In addition, if the growth rates of Korea's major trading partners slow faster than expected, that will affect Korea's exports and growth. Financial market volatility could tighten financial conditions. Global commodity prices are also volatile. If semiconductor exports weaken or demand for artificial intelligence (AI) softens, the semiconductor cycle could affect Korea's growth rate."
―Among the supplementary budget projects, which specific projects do you think positively boosted domestic demand in Korea?
"I think Korea's growth strategy is moving in the right direction. It is moving largely toward the areas mentioned at past annual meetings. Structurally, it is going in the right direction, including AI innovation and the development of service exports. If these efforts bear fruit, Korea's potential growth rate will rise, helping reach the current target of 3% growth."
―You emphasized securing long-term fiscal soundness, citing pension reform.
"Policies to support the economy, such as the two supplementary budgets this year and next year's budget bill, are appropriate. However, due to aging, Korea could face increasing expenditure pressures in the medium to long term. Looking at projections by various Korean institutions, spending on health insurance, pensions, and the old age pension could increase significantly over the medium to long term. As a result, national liability could rise. In that sense, securing policy space is also important. We must secure room to respond to shocks that could occur in the future. In the medium term, introducing a risk-based 'fiscal anchor' can address long-term spending pressures."
―Korea and the United States have broadly agreed on a trade negotiation premised on $350 billion in investment. That is about 80% of Korea's foreign exchange reserves. There are concerns that if foreign currency outflows of that scale occur, a currency crisis could follow. What is your view?
"The trade negotiation is still ongoing. It is too early to discuss the impact of the details. It is not yet at a stage where we can comment."