Seoul: The Bank of Korea (BOK) on Thursday sharply lowered its outlook for South Korea's economic growth this year to 0.8 percent, citing sagging consumption and slowing export growth amid uncertainties stemming from Washington's tariff measures. The revised real gross domestic product (GDP) outlook marks a 0.7 percentage-point drop from the central bank's previous forecast of 1.5 percent issued in February.
According to Yonhap News Agency, the adjusted figure falls far below the country's estimated potential growth rate of 2 percent, which means the maximum pace at which the economy can expand without triggering inflation. If realized, this year would mark the first time South Korea's annual growth rate dips below that threshold. Underscoring the bleak outlook and amid benign inflation, the BOK also cut its key interest rate by a quarter percentage point to 2.5 percent.
The BOK's latest projection is more pessimistic than those of other major institutions. The International Monetary Fund (IMF) recently offered a 1 percent growth projection for South Korea in 2025, while the Organization for Economic Cooperation and Development (OECD) projected a 1.5 percent expansion. The central bank also revised down its growth forecast for next year from 1.8 percent to 1.6 percent.
If the BOK's latest outlook is realized, it would mark the first time since 1953, when the country began compiling relevant statistics, that South Korea's economic growth rate hovers around 1 percent for two years in a row. BOK Gov. Rhee Chang-yong told a press conference that the construction sector had the greatest impact on the outlook adjustment, which contributed to lowering the forecast by about 0.4 percentage points.
"Private consumption lowered the growth forecast by approximately 0.15 percentage points, and exports contributed an additional 0.2 percentage point decline," Rhee said. Growth momentum is expected to begin recovering in the second half of this year, though uncertainties remain high regarding the United States' tariff policy and relevant global trade environments, he added. The BOK forecasts the economy will expand by 1.6 percent next year.
In the first quarter, South Korea's real GDP contracted 0.2 percent from the previous quarter, which marked the first on-quarter contraction in nine months. On a year-on-year basis, the economy contracted 0.1 percent during the January-March period. The unexpected contraction came as former President Yoon Suk Yeol's imposition of martial law in December caused political chaos and dampened consumer spending. Yoon was removed from office last month, and a subsequent presidential election is scheduled to take place on Tuesday.
"The domestic economy continued its sluggish pace in April, following a contraction in the first quarter due to a slower recovery in domestic demand, including consumption and construction investment, and due to decelerating exports growth," the BOK said in a release. "Domestic demand is expected to recover modestly, but at a slower pace, while exports are expected to slow further due to the impact of U.S. tariffs," it added.
U.S. President Donald Trump announced reciprocal tariffs, including a 25 percent levy on South Korean goods, though implementation was later postponed for 90 days. Trade negotiations are currently under way between South Korea and the U.S., with the two sides aiming to reach a "July package" agreement on trade and related issues by July 8.
Exports, a key economic growth engine for South Korea, increased 3.7 percent on-year in April, marking a third consecutive month of increase. But shipments to the U.S. declined significantly due to Washington's steep tariffs. If the U.S.' reciprocal tariffs are not implemented, this year's growth outlook is expected to improve by 0.1 percentage point, according to the BOK.
On Wednesday (U.S. time), a U.S. federal trade court blocked Washington from imposing sweeping tariffs, ruling that Trump's tariff regime is illegal. As for inflation, the BOK maintained its estimate for this year at 2 percent, while lowering the projection for next year to 1.8 percent from 1.9 percent. Consumer prices, a key gauge of inflation, rose 2.1 percent on-year in April, marking the fourth consecutive month that inflation has stayed within the 2 percent range.