The Bank of Korea "Lowers Next Year's Growth Rate by 0.2%P... Due to Trump Policies and Exports" [Q&A]

November Revised Economic Outlook Briefing
"Trump Policies Lower Growth Rate by 0.1%P in Next Two Years"
"'Low Growth' Is an Overstatement... Concerned About Decline in Potential Growth Rate"
"China Tariffs Impact in Second Half of Next Year, General Tariffs from Year After Next"

The Research Department of the Bank of Korea explained on the 28th that the reason for lowering next year's growth rate from the previous 2.1% to 1.9% by 0.2 percentage points was "a reflection of structural factors, including the economic policy changes of the new U.S. administration and the slowdown in exports in the third quarter."

At a revised economic outlook press briefing held at the Bank of Korea annex in Jung-gu, Seoul, the Research Department stated, "As a result of partially reflecting the economic policy changes of the new U.S. administration, the growth rates for next year and the year after next were each lowered by 0.1 percentage points," adding, "We will need to revisit how U.S. tariff policies might change after their launch during the February outlook."

Regarding the reason the economic growth forecast for the year after next was presented at 1.8%, they explained, "The difference between the forecasts for next year and the year after next is due to the timing of Trump's tariff policies. The China tariffs will start to have an impact from the second half of next year, and the universal tariffs will affect from 2026. Also, the baseline for the global economy itself is expected to be 3.0% next year, lower than this year, and 2.9% the year after next, so this has been reflected."

In response to concerns that the forecasted growth rates in the 1% range for both next year and the year after next might indicate a long-term structural low growth, they drew a line by saying, "The figure of 1.9% itself is not significantly lower than the potential growth rate of 2%, so the term 'low growth' is excessive," and added, "We should be more concerned about the decline in potential growth due to structural reform delays such as aging and low birth rates throughout the economy."

Below is a Q&A session with the Bank of Korea Research Department.

- The forecast was significantly revised from August. There is an opinion that the repeated theory of missed opportunities for rate cuts is because the economic outlook was too optimistic. The background of this rate cut includes the low economic outlook for next year. What are your thoughts on the theory of missed rate cuts and the differences from the August forecast? You mentioned that the uncertainty of next year's forecast is large; to what extent can it be adjusted?

▲(Lee Ji-ho, Director of Research Department) In the August forecast, this year's growth was projected at 2.4%. At that time, the International Monetary Fund (IMF) forecasted 2.5%, and the Organisation for Economic Co-operation and Development (OECD) forecasted 2.6%. Looking at third-quarter exports, low-end semiconductors performed poorly, while high-end semiconductors did well. Although export amounts were good, volumes were poor, and upon analysis, we realized there was a structural problem. This was reflected in next year's growth.

▲(Lee Ji-ho) In August, the Bank of Korea forecasted economic growth at 2.4%, and the IMF and others forecasted 2.5% and 2.6%, respectively. These levels exceeded the potential growth rate. Although the lowered growth rate is regrettable, we are considering what lessons can be learned to improve forecasting. At that time, we could not ignore the growing financial instability, rising real estate prices in the metropolitan area, and the rapid increase in household debt. I still believe that the response to these issues was appropriate. Considering the signs of financial instability, asking whether a spark should have been lit is an extreme example from the policymakers' perspective, similar to criticizing military drills by asking why prepare for war when there is no war. Currently, concerns about financial instability have significantly decreased. This is the Research Department's perception of the theory of missed opportunities. The reason for lowering rates this time is due to next year's growth rate, not this year’s.

▲(Kim Woong, Deputy Governor) To add, those who argue the theory of missed opportunities believe the Bank of Korea missed the timing for rate cuts, causing domestic demand to slump. However, the forecast predicted a 0.9 percentage point contribution from domestic demand, and the actual outcome matched the forecast. Therefore, the theory of missed opportunities is not logically sound.

▲(Kim Woong) The reason for lowering next year's growth rate from the original 2.1% to 1.9% by 0.2 percentage points is mainly twofold: changes in the economic policies of the new U.S. administration and the structural factors behind the slowdown in third-quarter exports. We reflected these in the revision. Partially reflecting the changes in U.S. economic policies led to lowering the growth rates for next year and the year after next by 0.1 percentage points each. We will need to revisit how U.S. tariff policies might change after their launch during the February outlook. This is why Governor Lee Chang-yong previously mentioned uncertainties regarding next year's growth.

▲(Lee Ji-ho) Recently, some institutions including the IMF have mentioned the risks related to the inauguration of the Trump administration but did not reflect these in their forecasts. Personally, I consider this irresponsible. From the perspective of economic forecasting, if possible, it is appropriate to use currently available information to incorporate realistic scenarios with high probability into assumptions and base forecasts on them. While uncertainty is indeed high, please understand that the Research Department reflected the results of multiple internal discussions using the information available so far.

- Among the assumptions of the economic outlook, it was assumed that when the U.S. imposes tariffs, relatively lower tariffs would be applied except on China. Does this mean tariffs lower than the universal tariff of 10% were assumed?

▲(Park Se-jun, Head of International Comprehensive Team) Regarding universal tariffs, Trump mentioned 10% during the election campaign and later changed it to 10-20%. Therefore, it is quite uncertain. Even assuming a lower bound of 10%, universal tariffs are considered to have a greater impact than tariffs on China. Imposing a 10% universal tariff would place a significant burden on U.S. prices and growth. Unlike China, universal tariffs have more room for negotiation with the counterpart countries. Considering this, we judge that universal tariffs will not be implemented exactly as promised. Looking at Trump's first term, he mentioned a 45% tariff on China but actually imposed tariffs around 10%, lower than 20%. Taking all this into account, we reflected a level significantly lower than 10%. However, tariffs will be applied differently by country depending on negotiation outcomes. We expect negotiations to involve expanding imports of U.S. products in exchange for lower tariffs.

- The economic growth rate for the year after next was presented at 1.8%, following 1.9% for next year, both below the potential growth rate for two consecutive years. How do you view concerns about structural long-term low growth?

▲(Kim Woong) The difference between next year's 1.9% and the year after next's 1.8% growth rates is due to the timing of Trump's tariff policies. China tariffs will start impacting from the second half of next year, and universal tariffs will affect from 2026. The baseline for the global economy itself is expected to be 3.0% next year, lower than this year, and 2.9% the year after next. Since this is based on currently available information, we will need to review it again in February.

▲Regarding the fixation on the 1% range, the figure of 1.9% itself is not significantly lower than the potential growth rate of 2%, so the term 'low growth' is excessive. We should be more concerned about the decline in potential growth due to structural reform delays such as aging and low birth rates throughout the economy.

▲(Lee Ji-ho) The assumptions include how the U.S. will act, how China will respond, and how other countries will react. Currently, we expect the impact to hit in the second half of 2025 and affect the entire year of 2026. The intention was not to imply anything about potential growth rates. If these assumptions are accepted, it is unlikely that the growth rate in 2026 will be higher than in 2025.

- Regarding the decrease in third-quarter exports, you judged that structural factors had a significant impact. This does not seem to be a recent issue.

▲(Lee Ji-ho) Correct. Structural changes cannot happen suddenly. However, analyzing third-quarter exports revealed something previously unknown: China's catch-up in low-end semiconductors. China's self-sufficiency rate has risen significantly, and for low-end semiconductors, two or three units can be used. If China decides to use domestic products and the government supports this, it is possible. This trend has become clear since August. The major trend is China's increased self-reliance, but there is significant quarterly volatility. Even within China, the trend to use domestic products was more pronounced in the third quarter. It was not a completely new trend.

- Inflation has decreased, so why was the private consumption forecast lowered?

▲(Lee Ji-ho) Compared to the falling inflation rate, the price level is still considered high. A decrease in inflation rate does not mean people will switch from cold noodles to knife-cut noodles. Decisions are made based on the price level, which remains high. Another point is that exports were the biggest factor when adjusting next year's growth rate. A decrease in exports and a decrease in domestic demand are separate issues. Although the trickle-down effect from exports has diminished compared to the past, exports still negatively affect private consumption, so the private consumption forecast was lowered.

- How much is the trade volume with China expected to decrease next year compared to this year?

▲(Yoon Yong-jun, Head of International Trade Team) China's heavy investment in low-growth semiconductor sectors is an old story. However, the reason it has been discussed recently is that it became more pronounced in the second half of this year. The issues currently being discussed in chemical products and steel sectors are not new, but companies have recently been experiencing difficulties. This has become quite prominent recently, coinciding with the global manufacturing downturn.

▲Regarding the trade balance with China, there was a deficit of $18 billion in 2023, the first in 20 years. This year, a deficit of around $6-7 billion is expected. For the time being, the trade balance with China is likely to be in deficit or slightly positive. China's recent technological advances in intermediate goods such as semiconductors, petrochemicals, and battery materials mean we have no choice but to import. Secondly, there is a low-price offensive due to China's oversupply, mainly in chemical products, to resolve this. South Korea is inevitably affected. On the other hand, China's self-sufficiency in semiconductors, which we export to China, has increased significantly. The trend of China leading South Korea's trade surplus as in the past seems difficult to continue.

- Inflation is expected to stabilize significantly next year. Is there a possibility that Trump's tariff policies could stimulate inflation?

▲(Park Chang-hyun, Head of Price Trends Team) The U.S. tariff increases are likely to raise inflation in the U.S. South Korea is experiencing dollar strength and upward pressure on the exchange rate due to Trump's election, which in turn puts upward pressure on import prices.

- Can rate cuts stimulate the sluggish domestic economy?

▲(Lee Ji-ho) Rate cuts will help in various ways. From the consumption side, borrowers will benefit from reduced principal and interest repayments. It can also help companies financially. Currently, the domestic economy, especially the construction sector, is in a poor state. Overall, interest rates are a blunt tool, but I think they act as a lubricant to help the economy function.

- The consumer price inflation forecast for next year is 1.9%, below the inflation target level of 2%.

▲(Lee Ji-ho) Currently, growth trends ultimately put pressure on prices. We have no idea how oil prices will behave next year and the year after. Over a longer horizon, demand pressures and other factors are assumed to affect prices with a lag. The forecast reflects a lack of strong economic growth next year and the year after.

- Is there a possibility of deflation?

▲(Lee Ji-ho) The inflation target is 2%. Even a slight rise in oil prices could bring inflation to 2%, and we need to keep monitoring exchange rates and other factors. The current price level is not significantly deviated from the target.

▲(Head of Price Trends Team) The presented inflation path itself rises toward the second half of next year. Although private consumption was revised downward, the trend is gradual. Since inflation was low in the second half of this year, a base effect could cause it to rise in the second half of next year. We do not expect inflation to continue falling over at least a two-year horizon.