“South Korean Economy Faces Both Domestic and External Headwinds”
“Difficult to Expect a Recovery in Domestic Demand”
Global investment bank Morgan Stanley has forecast that South Korea's economic growth rate will reach only 1.5% this year. The bank projected that if a supplementary budget worth 20 trillion won is drawn up and executed to stimulate the economy, the economic growth rate could be raised by 0.2 percentage points (P) from the end of this year through next year.
According to the financial investment industry on January 29, Morgan Stanley presented this outlook in its report "Growing at Bare Minimum," released on January 23.
The report included an analysis of the Bank of Korea's announcement on January 23 regarding real gross domestic product (GDP) for the fourth quarter and the full year of last year, along with an outlook for the South Korean economy this year.
Morgan Stanley explained its 1.5% GDP growth forecast for South Korea by stating, "Exports have entered a down-cycle, and a sluggish economic sentiment, along with a slowdown in activity across all sectors of the economy, is expected to delay the recovery in consumption." The bank added, "Going forward, South Korea will face both domestic and external headwinds."
Regarding domestic demand, Morgan Stanley noted, "Although the Bank of Korea cut its policy rate twice in the fourth quarter of last year, it will likely take another three to four quarters before this translates into a boost in consumption." The bank further explained, "Wage growth and private sector employment activity are expected to weaken, which will constrain household income," adding, "As a result, it is difficult to expect a broad-based recovery in consumption."
On external conditions, Morgan Stanley pointed out, "There are risks related to tariffs," referencing the tariff policies of the Donald Trump administration in the United States.
Morgan Stanley stated, "On the positive side, President Trump appears less aggressive than in a universal tariff imposition scenario." However, the bank also cautioned, "An increase in South Korea's trade surplus with the U.S. and the potential for future changes in tariff policy will add to the uncertainty surrounding South Korea's export outlook, especially amid the ongoing downcycle in memory semiconductors."
In terms of the future economic trajectory, the bank emphasized that policies such as supplementary budgets and policy rate decisions will be key.
Morgan Stanley said, "We expect the government to pursue an additional package (supplementary budget) worth up to 20 trillion won," adding, "It is likely to be aimed at supporting small businesses and low-income, highly indebted households, and we expect this to raise the growth rate by 20 basis points (1bp = 0.01 percentage points) from the end of this year through next year."
The bank also stated, "We expect the Bank of Korea to cut the policy rate next month and continue lowering it through the fourth quarter of this year," adding, "A low interest rate environment is expected to help drive a noticeable recovery in consumption starting from the fourth quarter of this year."
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