[Q&A] Bank of Korea: "Second Quarter Growth May Also Fall Short of Projections"

Q1 Real GDP Press Briefing
Domestic Demand Expected to Recover Slightly in Q2
"Unlikely to Offset Export Decline"
Impact of Tariffs Not Yet Evident in Statistics
Steel Tariff Effects Likely to Appear in May and June

The Bank of Korea has stated that the economic growth rate for the second quarter of this year may also fall below the projected figure of 0.8%. Although domestic demand is expected to recover compared to the first quarter, it is not anticipated to be sufficient to offset the decline in exports. The Bank also assessed that a rapid recovery in construction investment, which dragged down the growth rate in the first quarter, is unlikely.

Dongwon Lee, Director of Economic Statistics Division 2 at the Bank of Korea, said at a press briefing on the "Real Gross Domestic Product (GDP, preliminary) for the first quarter" on the 24th, "The current situation is not one where an external shock has caused a crisis, but domestic demand remains sluggish, and construction investment, in particular, has been a significant drag on growth compared to the second quarter of last year."

Regarding the background of the negative growth in the first quarter, he explained, "Prolonged domestic political uncertainty and concerns about the trade environment due to the United States’ announced tariff policies delayed investment and consumer sentiment. In addition, unusual factors such as deferred demand for high bandwidth memory (HBM), construction suspensions at certain sites, and large-scale wildfires acted as further downward pressures on growth."

Dongwon Lee, Director of Economic Statistics Division 2 at the Bank of Korea, is explaining the main features of the real Gross Domestic Product (preliminary) for the first quarter of 2025 at the Bank of Korea in Jung-gu, Seoul on the morning of the 24th. Provided by the Bank of Korea.

The following is a Q&A with Director Lee.

-Please provide the growth rate for the first quarter to the second decimal place.

▲It is -0.24%. In the second quarter of last year, it was also -0.2%, but to the second decimal place, it is worse than then.

-Tariffs on steel and aluminum began in mid-March. How did these affect first-quarter GDP?

▲According to March statistics, customs-cleared exports of steel decreased by 11.8%. If tariffs had an impact, exports to the United States should show a significant decline, while exports to other countries would remain similar to before. However, in reality, steel exports declined not only to the United States but also to most countries, including Japan, China, and Mexico. While tariff effects may have played a role, the impact of declining global steel demand appears to be greater. Typically, it takes two to three months from contract to export for steel. The impact of tariffs is likely to become more pronounced in May and June.

-How are things looking in April?

▲Exports have been briefly tallied through the 20th. Exports to the United States decreased by 14.3%, and imports also fell by 10.1%, resulting in a trade surplus of $2.17 billion. Exports of steel and petroleum products remain sluggish. While some of this may be due to tariff effects, global industrial conditions seem to have a greater influence at this point. On a positive note, semiconductor exports are maintaining double-digit growth. Whether this is due to front-loading or not, semiconductors are a leading export item for Korea, so this can help mitigate downward pressure on exports. Exports usually increase toward the end of the month, so we need to monitor the results through the end of April.

-Looking at the contribution to growth in the first quarter, domestic demand offset all of net exports. What is the outlook for a rebound in domestic demand?

▲It is not possible to provide a long-term outlook at this time. However, domestic political uncertainty has been resolved, and the effects of the policy rate cuts that began in October last year are expected to emerge. While a rapid recovery in domestic demand seems unlikely, there is a possibility of a slight improvement in the second quarter, mainly driven by private consumption. The basis for this is that consumer sentiment is likely to improve compared to the first quarter, and there are factors such as increased spending by non-profit organizations, which is influenced by the presidential election and related budget execution.

▲It is true that private consumption is not contributing to growth as much as before. There are structural factors such as high household debt and rapid aging, which are dampening consumption. In addition, after COVID-19, there was a significant increase in durable goods consumption as people replaced home appliances, and the base effect from this continues. For semi-durable and non-durable goods such as medical services, footwear, and food, prices rose sharply during the pandemic, and these high prices are now restricting consumption. However, since five years have passed, the replacement cycle for durable goods is approaching, which is a positive sign. For food and clothing, price stabilization is extremely important for improving consumption.

-Growth has been below 0.1% for four consecutive quarters. How do you view this trend of bottom-level growth for four straight quarters?

▲The current situation is not one where an external shock has caused a crisis. Domestic demand remains sluggish, and the biggest factor is construction investment. Since the second quarter of last year, it has acted as a drag on growth. For the full year last year, construction investment lowered GDP growth by 0.5 percentage points, and in the first quarter of this year, it reduced growth by 0.4 percentage points.

-Is there a possibility of a rebound in construction investment?

▲It is difficult to expect a rapid recovery. Prolonged high interest rates have led to an increase in unsold housing, and ongoing structural issues such as a sluggish housing market persist. Since the COVID-19 pandemic, global supply chain disruptions have caused material costs to rise significantly and remain elevated. Rising labor costs have also worsened profitability for construction companies. The slump in the construction sector has been a factor lowering growth over the past year. However, if public sector investment increases, it could help ease the investment slump.

Facility investment experienced a temporary adjustment in the first quarter, but on a medium-term outlook, it is in the best position and could turn positive.

This time, government consumption decreased as health insurance payments declined. Did the collective strike by doctors have an impact?

▲Health insurance expenditures decreased as the number of hospital visits fell. While there was some impact from disputes between doctors and the government, the greater factor appears to be the significant outbreaks of infectious diseases among children and adolescents in the second half of last year, which have since subsided.

-What are the main concerns for the second quarter?

▲The biggest concern is the impact of tariffs. However, it is honestly difficult to predict the extent. There are also issues related to active government fiscal spending, and despite the political difficulties in the first quarter, fiscal policy contributed to growth. Therefore, the outlook for the second quarter could be viewed a bit more positively. However, the second quarter projection is 0.8%, and growth may fall short of that. The projection for the second quarter was technically raised as the first quarter was revised down significantly. Even so, the projection for the first half is less than 1% year-on-year, which is not a favorable situation.

-Is the current situation worse than the pessimistic scenario for the impact of tariffs presented in February?

▲I cannot say there is no impact from tariffs, but export statistics do not show a clear effect. For steel, which is subject to tariffs, the greater factor seems to be the downturn in related global industries rather than the tariffs themselves. Regardless of whether semiconductors were front-loaded or not, exports through April 20 have been good, so please understand that the first quarter was simply lower than expected.

-Does that mean exports were positive through the 20th?

▲Exports decreased by 5.2%. I did not mean that exports overall were strong, but that semiconductor exports were strong. I mentioned this as a positive factor in terms of mitigating downward pressure. Overall, export performance is not particularly good.

-In February, the economic growth forecast for this year was set at 1.5%. With the first quarter falling short of projections, is there a possibility of a downward revision to this year’s forecast?

▲We usually provide a baseline for arithmetic calculations, but this time, as we are in a dark tunnel, such calculations do not seem meaningful. We will present a new forecast in the May economic outlook, so please wait until then.