Seoul: The central bank on Thursday raised its economic growth forecast for South Korea to 0.9 percent for this year amid signs of a recovery in consumption and eased uncertainties surrounding the United States' tariff scheme.
According to Yonhap News Agency, the revision by the Bank of Korea (BOK) marks a 0.1 percentage-point increase from its previous forecast of 0.8 percent issued in May.
"Consumption has improved on the back of the supplementary budget and stronger economic sentiment, and exports, led by semiconductors, remain solid," the BOK stated in a release. The economy is forecast to grow 1.1 percent in the third quarter compared with the previous quarter, faster than the previous projection of 0.7 percent, driven by the government's supplementary budget and robust semiconductor exports, while the fourth quarter is predicted to log a 0.2 percent expansion due to the impact of the United States' new tariff measures, it added.
The South Korean economy grew 0.6 percent on-quarter in the second quarter, following a 0.2 percent contraction in the first quarter. The revised outlook aligns with an earlier projection made by the government. The International Monetary Fund (IMF) presented a bleaker outlook of 0.8 percent growth for South Korea this year, while the Organization for Economic Cooperation and Development (OECD) has projected a growth rate of 1 percent.
Presenting a slightly more optimistic outlook, the BOK kept the key interest rate unchanged at 2.5 percent, remaining vigilant about financial stability risks stemming from rising housing prices in Seoul and elevated household debt. BOK Gov. Rhee Chang-yong mentioned that a recovery in consumption and solid exports each contributed 0.2 percentage point to this year's economic growth outlook, while a sluggish construction sector dragged the forecast down by 0.3 percentage point.
The first supplementary budget, totaling 13.8 trillion won (US$9.94 billion), had already been reflected in previous projections, while the second supplementary budget of 31.8 trillion won was only incorporated into the latest outlook, according to the BOK. The central bank also noted that the outcome of trade negotiations with the U.S. and the recent South Korea-U.S. summit had largely remained within the range of its initial scenario.
Late last month, Seoul and Washington announced a tariff deal under which the U.S. imposes a 15 percent tariff on South Korean imports, down from the initially threatened 25 percent, in exchange for South Korea's pledge to invest $350 billion in the U.S. The BOK revised up the consumer price inflation forecast for 2025 to 2 percent from the 1.9 percent it forecast in May.
For next year, the BOK maintained its growth forecast at 1.6 percent. "Domestic demand is expected to continue its recovery, but exports are projected to gradually slow due to the impact of U.S. tariffs," the BOK said. "The future growth path remains subject to elevated uncertainty, arising from factors such as U.S.-China trade negotiations, tariffs on semiconductors and developments in the construction sector," it added.
Despite the upward revision, the outlook for 2025 still remains well below the country's estimated potential growth rate of 2 percent, which means the maximum pace at which the economy can grow without fueling inflation. If realized, this year would mark the first time South Korea's annual growth rate falls below that threshold and the slowest expansion since 2020. "I believe that the country's potential growth rate has fallen below 2 percent, which is regrettable. Structural factors, such as population aging, have led to the decline in potential growth," Rhee said, calling for structural reform efforts.