BOK announces five consecutive downgraded growth rates

The Bank of Korea lowered its annual economic growth forecast for this year to 1.4%, five times in a row following May, August, and November of last year and February of this year. The forecast is more pessimistic than those published by major international organizations such as the Organization for Economic Co-operation and Development (1.6%) and International Monetary Fund (1.5%). This is because the effect of China's reopening has fallen short of expectations, and the recovery of the semiconductor industry has been slower than expected. Considering the economic slowdown, the base rate was frozen at 3.50% for three consecutive times.

The Bank of Korea reduced this year's annual GDP growth projection by 0.2 percentage points from 1.6 percent to 1.4 percent in its revised economic forecast announcement yesterday. After five downward revisions, the growth forecast was lowered by 1.1 percentage points. The economic growth forecast for 2024 was also lowered from 2.5% to 2.4%. BOK warned that if China's economic recovery is delayed and financial instability in developed countries worsens, the nation’s growth rate could drop to 1.1% this year and 2.1% next year.

The BOK's pessimistic outlook indicates that the situation surrounding the Korean economy is not going smoothly. As exports of semiconductors stumbled, the decrease in exports continued for the 8th month and the trade deficit for the 15th month in a row until this month. This year's cumulative trade deficit was USD 29.548 billion, 2.5 times year-on-year. The recovery of the semiconductor market is also expected to be delayed from the third quarter to the fourth quarter of this year. Accordingly, even if the economy recovers somewhat in the second half, breaking out of the structural low-growth cycle will be difficult.

It is unreasonable to interpret the BOK's downward revision of the growth rate and freezing of the benchmark interest rate as a signal for the end of austerity measures. Although last month's growth in the Consumer Price Index fell to the 3% level for the first time in 14 months, core inflation excluding agricultural and petroleum products rose 4.6%, still very high. We're not out of the woods about inflation yet, as electricity and gas rate hikes are also pending. We should also be wary of the possibility that household loans will increase and real estate will fluctuate in anticipation that interest rate hikes are over. We should also leave open the possibility that circumstances could dictate an additional rate hike.

Neither of these two goals, price containment, and economic growth, should be abandoned. The only way out of this dilemma is to restore our economy's growth potential. Structural reforms, including labor, education, and pensions, have become more urgent in this sense. "Trying to solve the problem with short-term fiscal and monetary policies without implementing structural reform is a shortcut to ruining the country," Bank of Korea Governor Lee Chang-yong said. We must focus all our capabilities on boosting corporate vitality and strengthening the economic fundamentals while solidifying price stability and fiscal soundness. This is because long-term growth is not warranted by loosening money through interest rate cuts and fiscal expansion without beefing up fundamentals.