THE Bank of Korea (BOK) cut its growth forecast for this year as the political turmoil triggered by President Yoon Suk-yeol’s short-lived martial law declaration continues to ripple through the economy alongside concern over the potential impact of Donald Trump’s policies on trade.
The central bank now sees the economy expanding between 1.6 per cent and 1.7 per cent in 2025, down from a November projection of 1.9 per cent, it said on Monday (Jan 20). That’s also below a 1.8 per cent projection by the finance ministry in its updated forecasts released little more than two weeks ago.
The announcement came just four days after the BOK held interest rates steady while hinting heavily at another rate cut to come in the next three months. The central bank already cut rates at two straight meetings at the end of last year, with the second reduction characterised by the BOK as partly a pre-emptive move to deal with possible US protectionist policies.
Among the key concerns for South Korea’s economic policymakers is the likelihood that Trump will impose tariffs that hit global trade following his inauguration later on Monday. Higher US tariffs on imports would likely shrink demand for items from key trading partners such as South Korea. Should Trump follow through with even tougher tariffs on South Korea’s biggest trading partner China, that might add to the economic pain for Seoul by cooling demand from Beijing.
The release of the forecasts in January instead of waiting until the scheduled time in February is an unusual step that points to the level of concern over the weaker outlook for the economy.
“Whether our February forecast for this year’s growth will be higher or lower than in January will depend on the timing of the resolution of the domestic political uncertainty, further government stimulus, and the economic policies of the new US administration,” the bank said, referring to weak consumer sentiment.
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The latest forecasts come three days before the BOK releases gross domestic product figures for the last three months of last year. The central bank now sees the economy eking out growth of just 0.2 per cent or lower in the last quarter, sharply down from its earlier view of 0.5 per cent.
South Korea is reeling from Yoon’s short-lived declaration of martial law on Dec 3, which led to his impeachment and suspension of his duties. His shock move rattled markets, hurt business sentiment and undermined the country’s diplomatic efforts. The Constitutional Court is now reviewing whether to permanently oust the president.
Governor Rhee Chang-yong cited the political instability as a factor of concern for the central bank following its stand-pat policy decision last week. He said all six board members were open to a rate cut within the next three months, a comment that suggests action in February is highly likely.
Rhee also indicated that he wanted the government to pull its weight. Rhee said an extra budget offering targeted help for businesses was needed to help prop up the economy.
The finance ministry has already announced a package of financing measures for exporters worth up to 360 trillion won (S$338 billion). The steps are aimed at boosting exporters amid the uncertainties in the global trade environment and include support for countering exchange-rate risks. Despite the amplified risks currently in play, the amount on offer is only slightly larger than last year’s 355 trillion won package. BLOOMBERG
