Experts Warn of Entrenched Low Growth... "Monetary Easing Needed for Economic Recovery" [MPC Poll②]

To Achieve Economic Recovery, Supplementary Budget and Rate Cuts Needed
Structural Reform Required in the Medium to Long Term
Key Variable for Monetary Policy: "Trump Second-Term Policy"
Export-Oriented Korea Highly Affected by U.S. Tariff Policy

Experts have assessed that the downside risks to the Korean economy this year are very high. This is because, as a country highly dependent on external factors, Korea will inevitably be significantly affected by the tariff policies of U.S. President-elect Donald Trump, and major export destinations such as China and Europe will also be impacted. Additionally, sluggish domestic demand, driven by weakened consumer confidence due to domestic political instability, was cited as another factor increasing downward pressure.

Many experts agreed that fiscal and monetary policy coordination, such as the formulation of a supplementary budget and a cut in the base interest rate, is necessary to support economic recovery. In the longer term, there was also a consensus on the urgent need for structural reforms in the Korean economy and the resolution of political instability.

The most frequently cited key variable for future domestic monetary policy was the "Trump second-term policy." Experts warned that if Trump's policies lead to a sharp rise in inflationary pressure, it could make the implementation of both monetary and fiscal policies more difficult. Other major variables included downward revisions to the economic growth rate, exchange rates, sluggish domestic demand, and domestic political instability. In the case of the exchange rate, it was assessed that prolonged volatility could hinder an adequate policy response to economic conditions.

To Achieve Economic Recovery, Supplementary Budget and Rate Cuts Needed... Structural Reform Required in the Medium to Long Term

According to a survey conducted by Asia Economy from January 6 to 10, targeting 20 analysts from domestic and international securities firms and researchers from economic institutes, 12 experts (multiple responses allowed) said a supplementary budget is necessary for economic recovery, while 8 cited the need for a base rate cut.

Recently, the government and political circles have been discussing the early implementation of fiscal spending and the formulation of a supplementary budget, considering that this year's economic growth rate is expected to fall to the 1% range. The opposition party argues that the supplementary budget should be executed early to provide support measures for small business owners and the self-employed.

Cho Yonggu, a researcher at Shin Young Securities, stated, "From the Bank of Korea's perspective, it seems inevitable to prioritize short-term economic response," adding, "After reaching the estimated neutral rate range of 2.25% to 2.75%, it would be desirable to adjust the pace of rate cuts and pursue economic recovery through coordination with government policies such as the supplementary budget."

Yoon Yeosam, a researcher at Meritz Securities, said, "A supplementary budget of 30 trillion won and a 75bp (1bp=0.01 percentage point) base rate cut are needed as part of coordinated fiscal and monetary policy," and added, "Additionally, the economy should be revived through support measures for export companies and diplomatic responses related to education with the U.S."

Experts also responded that long-term structural reform (5 experts), resolution of domestic political instability (4 experts), diplomatic responses related to trade (2 experts), and recovery of global demand (1 expert) are necessary for economic recovery.

Kim Seongsu, a researcher at Hanwha Investment & Securities, commented, "There are no special parameters for short-term economic recovery," and noted, "Low growth is a reality we must accept." He added, "Korea is a country where human resources are the key to economic growth. Without active deregulation and structural reforms such as increased flexibility in working hours, layoffs, and hiring, it will be impossible to avoid a long-term downward trend in growth rates."

Kim Seontae, a researcher at KB Kookmin Bank, said, "Rather than hasty macroeconomic expansion policies, it is urgent to normalize external factors such as political stability," and added, "As a long-term task, it is necessary to quickly address domestic structural imbalances and population aging."

Oh Seoktae, a researcher at SG Securities, stated, "Domestic political instability and the resulting sluggish domestic demand will be the most important variables," and explained, "It will be difficult to control the sentiment of economic contraction due to political instability until the impeachment trial and the launch of a new administration."

Key Variable for Monetary Policy: 'Trump Second-Term Policy'... "Export-Oriented Korea Highly Affected by U.S. Tariff Policy"

The most frequently cited key variable that could affect the Bank of Korea's future monetary policy was the "Trump second-term policy," with 9 experts (multiple responses allowed) selecting it.

Kang Seungwon, a researcher at NH Investment & Securities, explained, "As an export-oriented country, Korea will inevitably be greatly affected by U.S. tariff policy," and added, "In particular, once the outline of Trump's tariff policy becomes clear, China and Europe are also expected to respond with their own measures. Since all three major economic blocs are Korea's main export destinations, the most crucial factor at present is the direction of Trump's policy."

Other key variables cited included downward revisions to the economic growth rate (7 experts), exchange rates (7 experts), sluggish domestic demand (6 experts), domestic political instability (4 experts), and the timing of U.S. rate cuts (3 experts).

An Yeha, a researcher at Kiwoom Securities, assessed, "If upward pressure on the exchange rate intensifies, the Bank of Korea's room for rate cuts will be reduced," and added, "If Trump's policies lead to a sharp rise in inflationary pressure, it will become difficult to implement monetary and fiscal easing policies, raising concerns about downside risks to the economy."

An Jaegyun, a researcher at Shinhan Investment Corp., explained, "Domestic political instability triggers sluggish domestic demand and slows growth, but it is also a factor that can trigger financial instability, such as a rise in the exchange rate," and added, "While the focus of future rate cuts will depend on which factor is emphasized, it is more important to focus on the slowdown in growth rather than the exchange rate."

Baek Yunmin, a researcher at Kyobo Securities, cited downward revisions to the economic growth rate and Trump's policies as key variables, stating, "Since the Monetary Policy Committee last November, the focus of domestic monetary policy has shifted to responding to economic risks," and added, "Although exchange rates and financial stability can also be variables, I do not believe that the expansion of downside economic risks will prevent a monetary policy response."

There was also concern that the increase in household debt could emerge as a new variable for monetary policy. Kim Sanghoon, a researcher at Hana Securities, warned, "If the Bank of Korea lowers the base rate to the low 2% range, the risks to financial stability could reemerge."