Bank of Korea lowers growth forecast to 0.8 percent

The Bank of Korea sharply lowered its growth forecast for this year to 0.8 percent, confirming near-zero growth expectations. The central bank pointed to a prolonged domestic demand slump and the damaging effects of U.S.-led tariff disputes as key threats. Despite an emergency 0.25 percentage point cut in the benchmark interest rate, experts say this is unlikely to revive the slowing economy.

On Thursday, the Bank of Korea cut its growth forecast from 1.5 percent three months ago to half that level. This adjustment followed a 0.2 percent contraction in first-quarter GDP, making a revision unavoidable. Even with smooth U.S. trade negotiations and significant tariff cuts, the bank predicts growth will remain below 1 percent, at 0.9 percent. Next year’s forecast was also lowered by 0.2 percentage points to 1.6 percent. If realized, it would be the first time since 1954 that South Korea’s growth has fallen below 2 percent for two consecutive years.

The Bank of Korea’s Monetary Policy Committee lowered the benchmark rate from 2.75 to 2.5 percent, but challenges remain in reversing the economic downturn. Rising food and dining costs, combined with political uncertainty, continue to weigh on consumer confidence. Companies facing shrinking profits have limited capacity to invest. Steeper rate cuts risk inflating fragile housing prices in Seoul and increasing household debt.

With monetary policy constrained, fiscal measures must take the lead. Earlier this month, the government approved a 13.8 trillion won supplementary budget primarily for wildfire recovery in the Yeongnam region, but its impact on growth remains limited. Ahead of the June 3 presidential election, Democratic candidate Lee Jae-myung has promised a second supplementary budget exceeding 20 trillion won, while People Power Party candidate Kim Moon-soo proposes a 30 trillion won package. Such spending could raise growth by 0.2 to 0.5 percentage points.

Given limited resources, concentrating spending on high-impact sectors is essential. While direct cash support to millions of small business owners offers immediate relief, it has a limited effect on overall growth. Greater benefits are expected from funding stalled infrastructure projects and construction. Investments in emerging industries, such as artificial intelligence and secondary batteries, are also vital for boosting growth potential.

Whether South Korea can escape the trap of near-zero growth this year depends on the decisions and execution of the new government set to take office next week.