[Q&A] Bank of Korea: "1% Annual Growth Possible with 0.8% Growth in Second Half"

Press Briefing on Second Quarter Real GDP
Recovery in Domestic Demand... "Expected to Improve Further in the Second Half"
Limited Tariff Impact in Q2... "Negative Effects Likely to Grow in the Second Half"

The Bank of Korea has forecast that the contribution of exports to economic growth will decrease in the second half of this year, while the recovery of domestic demand may further expand. The Bank stated that, arithmetically, an average growth rate of 0.8% in the second half is necessary to achieve an annual growth rate of 1% for the year.

Dongwon Lee, Director of the Economic Statistics Division 2 at the Bank of Korea, said at the press briefing on the "Preliminary Real Gross Domestic Product (GDP) for the Second Quarter" on the 24th, "Until the second quarter, the impact of tariffs was limited, but from the third quarter, the impact of U.S. tariffs will become more pronounced and will have a negative effect on exports." He added, "On the other hand, domestic demand could improve further due to the recovery in consumer sentiment and the effects of the second supplementary budget."

Regarding the background for the 0.6% economic growth rate in the second quarter, which marked an escape from near-zero growth for the first time in five quarters, Lee explained, "Although construction investment remained sluggish, export performance, led by the semiconductor sector, was better than expected. Additionally, the resolution of domestic political uncertainty revitalized sentiment and helped private consumption recover." He evaluated that "the private sector made a significant contribution to growth, mainly through exports and consumption."

Dongwon Lee, Director of the Economic Statistics Division 2 at the Bank of Korea, is speaking at the press briefing on the preliminary real Gross Domestic Product for the second quarter of 2025, held 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 second-quarter growth rate to the second decimal place.

▲It is 0.61%.

-What is your outlook for economic growth in the second half of the year?

▲While exports actually drove growth in the second quarter, from the third quarter, the impact of tariffs will become more pronounced and negatively affect exports. Domestic demand could improve further, so I think the situation will differ from the second quarter.

-If the effects of the supplementary budget are included, is it arithmetically possible to achieve 1% growth for the year?

▲Since U.S. tariffs have not yet been finalized, it is not appropriate to discuss the likelihood of achieving this. In the May forecast, the annual growth rate was projected at 0.8%. If the supplementary budget is included, it would be 0.9%. Arithmetically, to achieve 0.9%, an average growth rate of about 0.7% in the second half would suffice. For 1% or higher, an average of 0.8% or more is needed.

-The second-quarter growth rate exceeded the May forecast (0.5%). Please explain the specifics. How much of the effect of the first supplementary budget was reflected?

▲The main reason was that exports performed better than expected. Investment was lower than anticipated, and consumption was at a similar level. The first supplementary budget began on May 1, but its impact was not significantly reflected in the second-quarter growth rate. The government announced that more than 70% would be executed by the end of July. Disaster recovery and prevention expenditures are counted as government consumption, while construction investment reinforcement is counted as construction investment. However, the timing of execution and the timing of reflection in the growth rate are different. The execution rate is recorded when the central government allocates the budget to local governments, but the growth rate is recorded when the institution actually executes it. For construction investment, it is recorded when the actual service fee is paid. The budget to ease the burden on small business owners is also reflected in private consumption when it is actually used, so it is likely to have more impact in the third quarter than in the second quarter.

-The livelihood recovery support fund has begun. What impact do you expect it to have on private consumption in the third quarter?

▲Looking at the case of the COVID-19 disaster relief fund in May 2020, the effect was greatest in the early phase among the early, middle, and late phases. While the livelihood recovery support fund, which started in July, is not exactly the same, it can be used as a reference. A precise analysis will only be possible after the end of the year.

▲If the first supplementary budget influences growth mainly through government expenditure, the second is designed to influence growth mainly through private consumption. Therefore, it is clear that it will have a positive effect on growth.

-Private consumption was strong in the second quarter. You mentioned an increase in spending on entertainment and culture. What specific types of consumption increased?

▲Private consumption increased by 0.5%, which is similar to the forecast. Looking at it by month, May was better than April, and June was better than May. Among services, the entertainment and culture sector saw a significant increase in ticket sales for performances. Demand for restaurants, which had been sluggish, also recovered.

▲It is clear that previously suppressed consumer sentiment has revived. The strong performance of the stock market also contributed to the improvement in private consumption.

-Government consumption increased in the second quarter, mainly due to health insurance benefits. Was there any special reason?

▲Specific factors include the impact of applying health insurance coverage to breast cancer and the significant expansion of the number of high-difficulty surgeries covered for children to 604 cases. The election expenses incurred by the National Election Commission during the presidential election also contributed to the increase in government consumption.

-The decline in construction investment narrowed. Should this be seen as an improvement, or is the slump deepening? Please explain.

▲Construction investment was a major factor in lowering the annual growth rate last year and also reduced first-quarter growth by 0.4 percentage points. This time, the negative impact was about half as much. It can be seen as a moderation of the slump, but looking at leading indicators such as construction starts and orders, a rapid recovery is unlikely. We will have to wait until around the end of the year.

-Given the impact of tariffs, the strong export performance in the second quarter seems unexpected. Was it due to an increase in shipments to the U.S. ahead of the full-scale implementation of tariffs?

▲Semiconductor exports continued to perform well. In the second quarter, exports of petroleum and chemical products also improved. Petroleum exports benefited from reduced refining capacity in the U.S. and Europe, while for chemical products, the expansion of import licenses for pharmaceuticals in the U.S. and Europe played a role. Cosmetic exports continued to see steady demand due to the influence of the Korean Wave. There was also a significant increase in pre-emptive demand before the imposition of tariffs.

▲Until the second quarter, tariffs did not appear to have a major impact. There was a mutual deferral of tariffs, and companies responded proactively. For automobiles and steel, efforts were made to minimize price increases. In addition to price reductions, there were also efforts to diversify production locations. A representative example is automobiles; in the second quarter, exports of electric vehicles to Europe increased significantly. Companies seem to be responding more cautiously than expected while monitoring U.S. trade negotiations.

▲For July, as of the 20th, exports were down 2.2% year-on-year, but this was due to the number of business days. Excluding this factor, exports actually increased by 4.1%. Semiconductor exports remain strong, and even as of the 20th, the impact of tariffs is not significant. However, once tariffs are finalized, exports in the order sector are likely to slow down.

-If the tariff negotiations result in a level similar to that with Japan, would the outlook be closer to the positive or negative scenario in the May forecast?

▲If the level is similar, it is unlikely to deviate significantly from the May forecast. It is expected to be slightly worse than the May projection, so the May forecast level is likely to be maintained in the second half.

-What does it mean that real GDI growth exceeded GDP, and what ripple effects are expected going forward?

▲GDP is an indicator that measures the actual increase in volume, excluding price factors. When GDI is higher, it means that the income earned through external transactions exceeded the increase in volume through exports and imports. If this trend continues, corporate earnings are likely to improve. It could also be a factor in increasing investment and have a positive impact on consumption.