"Worst Uncertainty in History"... 3 Reasons Why Next Year's Economic Outlook Is Difficult [Why&Next]

①Trump Tariffs Could Cut Our Growth Rate by 1.1%P
②Concerns Over Semiconductor Export Peak Affecting Growth
③Expected Slowdown in Domestic Demand Improvement Possible

President-elect Donald Trump of the United States

On the 28th, as the Bank of Korea announced revisions to its economic outlook, evaluations emerged that uncertainty surrounding next year's economic forecast is greater than ever. Depending on the intensity of the tariff policies of the second Trump administration, South Korea's economic growth rate next year could fall by more than 1 percentage point. Additionally, the slowdown in semiconductor growth, which supported the economy this year, and the unstable domestic demand are also cited as factors increasing forecast uncertainty.

As major domestic and international research institutions have successively downgraded South Korea's economic growth forecast for next year, the Bank of Korea is expected to face deeper concerns about forecast errors than ever before.

Trump's Tariff Policy Could Lower South Korea's Economic Growth Rate by 1.1 Percentage Points in the Worst Case

The biggest variable in next year's economic outlook is the tariff policy of the second Trump administration. Major domestic research institutions have analyzed that depending on the intensity of Trump's tariff policy, South Korea's exports could decrease, and the economic growth rate could fall by more than 1 percentage point.

The Hyundai Research Institute expects that if a tariff war between the U.S. and China breaks out next year, South Korea's economic growth rate will decrease by 0.5 percentage points. If the Trump administration begins to impose tariffs forcibly on all countries trading with the U.S., including China, South Korea's economic growth rate will drop by 0.6 percentage points.

On the 25th (local time), Trump announced via his social media that on January 20th next year, the day of his inauguration, he would impose an additional 10% tariff on China and 25% tariffs on Mexico and Canada, raising the likelihood of this forecast becoming reality. The Hyundai Research Institute predicts that in the most negative scenario, where the tariff war between the U.S. and China continues and all countries worldwide join the tariff war, South Korea's economic growth rate could decrease by up to 1.1 percentage points.

South Korea's exports could also decline due to Trump's tariff policy. A decrease in exports negatively affects the economic growth rate. The Korea Institute for International Economic Policy (KIEP) forecasted that if the U.S. imposes universal tariffs on South Korea, the country's total exports could decrease by at least $22.2 billion and up to $44.8 billion. The Korea Institute for Industrial Economics and Trade also estimated that if the universal tariffs (10-20%) promised by President Trump are actually imposed, South Korea's exports to the U.S. could decrease by 8.4-14.0% (approximately $5.5 billion to $9.3 billion). This is estimated to reduce South Korea's economic growth rate next year by about 0.1-0.2 percentage points.

Jung Kyu-chul, head of the Economic Outlook Office at the Korea Development Institute (KDI), said, "At this point, the biggest uncertainty in our economic outlook is U.S. trade policy," adding, "After former President Trump’s election, when his term begins in January next year, the direction of various trade policies such as tariff increases and the extent to which promises will be realized are the most uncertain factors."

Uncertainty in Semiconductors Also a Major Variable in Economic Outlook

This year, exports led South Korea's economic growth, with the semiconductor sector's improved business conditions having the greatest impact. Semiconductor exports have increased year-on-year for 12 consecutive months from November last year to last month, setting record highs.

However, the recent slowdown in export growth has raised concerns about a peak in the semiconductor market. The Bank of Korea's announcement on the 24th of last month showed that South Korea's third-quarter economic growth rate was only 0.1%, far below the initial forecast of 0.5%. This was largely due to net exports (exports minus imports) pulling down the growth rate by 0.8 percentage points. The slowdown in export growth of key items such as semiconductors, automobiles, and secondary batteries was the cause.

Regarding semiconductors, high value-added products such as High Bandwidth Memory (HBM) are expected to maintain good export performance next year, but demand for legacy (general-purpose) DRAM and NAND flash, which have been widely used, may weaken.

Joo Won, head of the Economic Research Office at Hyundai Research Institute, said, "As the semiconductor business cycle enters a slowdown, the deceleration in export growth is a factor increasing uncertainty in next year's economy," adding, "Depending on semiconductor export conditions, there is a possibility that the 1% growth rate next year could become a reality."

Possibility of Slower Domestic Demand Recovery Also a Factor of Uncertainty

The delay in the recovery of domestic demand is also increasing uncertainty in the economic outlook. The retail sales index for the third quarter of this year, which indicates consumer trends, decreased by 1.9% compared to a year earlier, marking a decline for two and a half years since the second quarter of 2022 (-0.2%). This is the longest period since related statistics began in 1995.

Unlike the government's repeated use of the phrase "signs of domestic demand recovery" in the Economic Trends (Green Book) from May to October, the recent November issue withdrew this expression. The Ministry of Economy and Finance explained that while the assessment of domestic demand is not significantly different from the previous month, the change in expression reflects increased economic uncertainty.

For domestic demand recovery, not only government fiscal policy but also a cut in the Bank of Korea's base interest rate is necessary. However, the uncertainty surrounding the Bank of Korea's monetary policy makes economic forecasting difficult. Recently, the won-dollar exchange rate surpassed 1,400 won, and concerns about household debt have grown, making it difficult for the Bank of Korea to lower the base interest rate.

Jung said, "Whether the Bank of Korea cuts interest rates will be an important variable in next year's economic outlook," adding, "If the Bank of Korea continues to lower interest rates, it will be a positive factor for domestic demand."