Korea Investment & Securities Lowers Annual Growth Forecast to 0.7%
Hana Securities Also Cuts to 0.8%
"Both Domestic Demand and Exports Remain Vulnerable"
As the South Korean economy fell into the quagmire of negative growth in the first quarter of this year, securities firms are successively lowering their annual growth forecasts to the 0% range. There is a growing consensus that the need for a policy rate cut and the formulation of an extra budget has become more urgent to support the economy.
On April 25, Korea Investment & Securities stated in its report "Korea Q1 GDP: Worsening Domestic Demand and Unstable Exports" that "the first quarter was expected to be the bottom, but the depth was greater than anticipated," adding, "Reflecting the negative growth in the first quarter, we are revising our 2025 annual growth forecast down from 1.1% to 0.7%." On the same day, Hana Securities also lowered its 2025 growth forecast to 0.8%, explaining, "Given the sluggishness both domestically and internationally, and the uncertainties that may arise in the future, a downward revision is inevitable."
The real gross domestic product (GDP) growth rate for the first quarter, released the previous day, was recorded at -0.2% quarter-on-quarter. This is 0.4 percentage points lower than the official forecast (0.2%) previously announced by the Bank of Korea in February.
Moon Daun, a researcher at Korea Investment & Securities, explained, "Amid negative domestic and external conditions, private consumption, investment, and exports all declined," adding, "The contribution of domestic demand plummeted, dragging down the overall growth rate. This is the first negative figure since the fourth quarter of 2020." Jeon Kyuyoun, a researcher at Hana Securities, warned, "The risk of growth in the 0% range has become a reality," and added, "If we also consider negative factors that have not yet been reflected, both domestic and external sectors remain vulnerable."
Unlike domestic demand, which hit bottom in the first quarter, there are still concerns about downside risks to exports. Researcher Moon noted, "From the second quarter, we expect domestic demand to recover as political instability eases and the effects of policy support, such as early fiscal execution and a policy rate cut, are reflected." However, he pointed out, "Exports remain a concern."
He explained that while there is still room for negotiation with the Donald Trump administration in the United States, downside risks to exports remain due to not only the 10% universal tariff but also item-specific tariffs on key products such as automobiles and the intensification of US-China tensions. He predicted, "While a moderate recovery led by domestic demand is expected from the second quarter, exports are likely to remain weak, resulting in a mixed outlook."
Researcher Jeon also stated, "If the impact of Trump tariffs becomes pronounced from the second quarter, it will inevitably increase downward pressure on the external sector," noting that exports from April 1 to 20 posted negative growth of -5.2% year-on-year, with exports to the US in particular recording -14.3%. He explained, "Even if mutual tariff rates are lowered through Korea-US trade negotiations, the impact of the 10% universal tariff is unavoidable, and we must also consider item-specific tariffs and the prolonged effects of the US-China trade dispute going forward."
He added, "Whether the South Korean economy achieves 1% growth will depend on the Korea-US trade negotiation process and the scale of the extra budget in the second half of the year," and predicted, "The need for a rate cut and an extra budget will increase." According to Hana Securities, a comprehensive review of the effects of extra budgets on growth from 2009 to 2019 shows that fiscal spending equivalent to 1% of GDP raised Korea's growth rate by an average of 0.33 percentage points.
Park Sanghyun, a researcher at iM Securities, assessed, "There is a high risk that the trend of negative growth will continue into the second quarter," and emphasized, "Given external uncertainties, preemptive and strong stimulus policies are urgently needed." He diagnosed that it is difficult to expect a rebound in the consumption and investment cycle during the second quarter. Although the impeachment crisis has ended, the absence of a policy control tower has led to fiscal policy still not being implemented in a timely manner, which is also a cause for concern.
Choi Kwanghyuk, a researcher at LS Securities, expressed strong concern about sluggish domestic demand, stating, "There is a strong tendency to view exports as the pillar of the South Korean economy, but ultimately, the foundation of GDP is centered on what is produced and consumed domestically." Researcher Choi added, "Although concerns about inflation and household debt are quite high, the priority in the current economic situation should be economic recovery," and concluded, "South Korea also needs a 'Whatever it Takes' approach, as advocated by former Federal Reserve Chairman Ben Bernanke."
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