Growth Rate Maintained at 1% This Year
Korea-US Trade Talks Ease Uncertainty
Signs of Recovery in Domestic Economic Growth
BNP Paribas stated that there are many positive signals for the Korean economy, such as increased consumer spending and the Korea-US trade negotiations. The bank raised its forecast for next year's economic growth rate by 0.3 percentage points to 2%. The forecast for this year's economic growth rate was maintained at 1%.
Yoon Jiho, Senior Economist at BNP Paribas, said on the 31st in the report "Revisions to Korea's GDP, CPI, and Policy Rate Forecasts," "The recent conclusion of the Korea-US tariff negotiations is expected to help reduce uncertainty, and the domestic growth trend is also showing signs of recovery." He added, "New driving forces supporting consumption are emerging, such as the second supplementary budget and the wealth effect."
The upward revision of Korea's economic growth rate, according to Yoon, is mainly due to consumption. Korea's GDP in the second quarter of this year was driven by a recovery in consumption, which occurred despite sluggish investment, Yoon explained. Additionally, he anticipated that the second supplementary budget and the upward trend in the domestic stock market would create a 'wealth effect.' The wealth effect refers to the phenomenon where an increase in asset value leads to increased consumption. Since this wealth effect typically impacts consumption with a lag of one to two quarters, it is considered a positive factor for next year's economic growth rate.
He also argued that the recently concluded Korea-US trade negotiations would help reduce economic uncertainty. He said, "Although the mutual tariff rates are higher than the 10% we assumed, overall, the outcome of the agreement is largely in line with our expectations and is similar to the effective tariff rate of 15% assumed by the Bank of Korea." He emphasized, "From the perspective of businesses, it can help reduce uncertainty. Korea's tariff rate is similar to those of major countries such as the European Union (EU) and Japan, and it is lower than the tariff rates announced by other countries so far."
Yoon said that he does not have significant concerns about inflation, stating, "We maintain our forecast for this year's consumer price inflation rate in Korea at 2.2%, and we have revised next year's figure downward by 0.1 percentage point to 2%."
He noted that the real estate measures introduced by the government in June contributed to stabilizing the housing market, but added, "I view the current housing market situation as a 'truce' rather than a 'return to normal.'" In fact, the weekly increase rate of housing prices in Seoul slowed from 0.4% to 0.2%, and the number of transactions plummeted from 11,900 in June to 2,700 last month. The increase in household loans from the five major banks (Kookmin, Shinhan, Hana, Woori, Nonghyup) also dropped from 6.8 trillion won in June to 4.1 trillion won as of July 24. However, he said, "The government may introduce additional measures, including supply expansion or tax policies," and analyzed, "It is premature to judge that the housing market has stabilized. The Bank of Korea will also approach the situation cautiously, as excessive expectations for rate cuts could lead to another rise in housing prices and household debt."
Regarding the timing of the Bank of Korea's policy rate cut, he projected it would occur in the fourth quarter rather than this month. He said, "Considering these circumstances, it is highly likely that the Bank of Korea will implement the next policy rate cut in the fourth quarter, not in August." He added, "We maintain the terminal policy rate at 2.25%, and at this point, we do not expect a rate cut in 2026."
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