BOK lowers GDP outlook to 0.8%, a level seen only in past crises

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BOK lowers GDP outlook to 0.8%, a level seen only in past crises

Published: 29 May. 2025, 18:33 Updated: 29 May. 2025, 19:47

PARK EUN-JEE
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Audio report: written by reporters, read by AI

Bank of Korea Gov. Rhee Chang-yong speaks during a press briefing in central Seoul on May 29. [JOINT PRESS CORPS]

Korea’s central bank sharply downgraded its 2025 growth outlook to 0.8 percent on Thursday — a level previously seen only during the Asian financial crisis, the global financial crisis and the peak of the Covid-19 pandemic.

The downbeat projection, almost halved from the previous 1.5 percent, came after the Bank of Korea (BOK) cut its benchmark interest rate by 0.25 percentage points to 2.5 percent in a unanimous decision.

The revision is attributed primarily to a slump in the construction sector, weak domestic demand and stagnant exports. By numbers, construction caused a cut of 0.4 percentage points, domestic demand 0.15 percentage points and exports 0.2 percentage points.

“The recovery in domestic demand has been delayed, while export growth is expected to slow further due to the impact of U.S. tariffs,” the central bank noted in a statement.

“The future growth path is subject to both upside and downside risks related to trade negotiations, and will be significantly influenced by whether, and to what extent, the government’s economic stimulus measures are implemented,” it said.

The updated forecast is based on an assumption that Korea faces a 10 percent baseline tariff, which was already implemented in April, and a 25 percent country-specific duty that is subject to change depending on the ongoing negotiations with the United States.

A lease notice is posted on a storefront in Myeong-dong, Jung District, central Seoul, on May 25. [YONHAP]

Even in a positive scenario where the tariff rate is eased by a significant degree, growth remains at 0.9 percent, according to the BOK, a testament to the shaky fundamentals of the country’s economy on top of external, one-off challenges.

This would mark the fourth time since Korea’s democratization in 1987 that annual growth falls below 1 percent. Growth below 1 percent has been extremely rare, occurring only during major crises such as the 1998 Asian financial crisis with negative 4.9 percent, the 2009 global financial crisis at 0.8 percent, and the Covid-19 in 2020, which recorded negative 0.7 percent growth.

The gloomy outlook made four out of six monetary policy board members call for a cut within three months in their forward guidance.

The tremors of low growth rippled during the first quarter when the economy contracted by 0.2 percent, prompting some analysts to anticipate the so-called big cut of 0.5 percent at once.

Asked why the BOK opted not to execute a larger cut, Bank of Korea Gov. Rhee Chang-yong warned of a potential bubble in the real estate market as a steep decline in interest rates could lead more people to chase after property purchases with cheaper loans.

“In times of heightened uncertainty like now, injecting liquidity is more likely to inflate asset prices rather than lead to more corporate investment or a real economic recovery, raising the risk of repeating the mistakes made during the Covid-19 crisis,” he said during a press briefing following the rate decision.

At the same time, the modest growth of consumer prices and the low won-dollar exchange rate also fostered conditions conducive to a rate cut. The central bank anticipated that this year’s consumer price index, a key measurement of inflation, will come in at 1.9 percent.

Rhee stressed that to turn the tide, the new government should be prudent in carrying out stimulus measures like supplementary budgets.

“When stimulating the economy, what is crucial is where the resources are allocated and to what extent,” the governor said.

Analysts anticipate follow-up rate cuts for the rest of the year.

"After the widely anticipated rate cut in the May meeting, we continue to expect the next rate cut in August or during the third quarter," said Yoon Jee-ho, a senior economist at BNP Paribas.

"However, there is a risk of a delay in the timing of the next cut, considering the upside risks to the Bank of Korea’s GDP growth forecasts and financial stability risks related to household debt," he noted in a statement.

BY PARK EUN-JEE [[email protected]]