"This Year's Growth Rate 1.6~1.7%... Political Uncertainty Lowers It by 0.2%P"

Bank of Korea, Unusually Releases Revised Economic Outlook in January

Reflects Negative Impact of Last Year's Q4 Impeachment

Downgraded from November's 1.9% Forecast

Uncertainty Twice as High as During Roh and Park's Impeachments

Revises Forecast After Reviewing Economic Changes

Political Instability Continuation is the Biggest Variable

Supplementary Budget and Trump Policy Speed Also Impact

The Bank of Korea warned that South Korea's economic growth rate could remain at 1.6% this year. It sees political uncertainty leading to a contraction in domestic demand, making the initially projected 1.9% growth difficult. It pointed to political schedules, the government's supplementary budget plan, and the speed of policy implementation by the Donald Trump administration as variables.

○This Year's Growth Rate 1.6~1.7%

On the 20th, the Bank of Korea presented a growth rate forecast of 1.6~1.7% for this year in a blog post titled 'Bank of Korea's Economic Assessment at the January Monetary Policy Committee Decision.' This is 0.2~0.3 percentage points lower than the 1.9% announced at the end of November last year. It is lower than the growth rates forecasted by major domestic and international institutions such as the Ministry of Economy and Finance (1.8%), the International Monetary Fund (2.0%), and the Organization for Economic Cooperation and Development (2.1%). It is also expected to fall below the average of eight global investment banks (1.7%).

The Bank of Korea adjusted its growth rate forecast downward due to the significant impact of political uncertainty on the economy. Lee Ji-ho, head of the Bank of Korea's Research Department, explained, "Political uncertainty triggered by the martial law situation in December last year and the resulting economic sentiment contraction will lower this year's growth rate by 0.2 percentage points." Bank of Korea Governor Lee Chang-yong said at a press conference after the Monetary Policy Committee's monetary policy direction meeting on the 16th that political uncertainty had raised the won-dollar exchange rate by about 30 won.

The Bank of Korea sees the political uncertainty following President Yoon Suk-yeol's impeachment situation as significantly higher than during the impeachments of former Presidents Roh Moo-hyun and Park Geun-hye. The highest political uncertainty index calculated during this situation was about 14 points, nearly double the highest points during the previous two impeachments (7~8 points).

Political uncertainty has been negatively affecting the economy since the end of the fourth quarter last year. Director Lee said, "From the last week of December last year (25th~31st), card approval amounts turned negative compared to the same period last year," and "a similar trend continues in early January (1st~12th)." The Bank of Korea expects the fourth-quarter growth rate to fall below 0.2%, shrinking to less than half of the 0.5% forecasted at the end of November. Last month's imported car sales decreased by 16.7%, and apartment sales were recorded at 21,000 units, less than the initially planned 25,000 units.

○Unusual January Forecast Due to Rapid Political Changes

It is unusual for the Bank of Korea to revise its growth rate forecast in January. The Bank of Korea releases growth rate forecasts four times a year in February, May, August, and November. Director Lee explained, "There was an unexpected expansion of political risks after the November forecast," and "it was necessary to diagnose the impact on the Korean economy before the official forecast and share it with domestic and international economic entities."

JP Morgan recently lowered its growth rate forecast for South Korea to 1.3%, contributing to the formation of an excessively negative view. He said, "There is also a purpose to provide a reference point by announcing specific figures." The Bank of Korea plans to review the changing economic environment and revise the forecast again by the time the official forecast is released on the 25th of next month.

The Bank of Korea cited the continuation of political uncertainty as the biggest variable. The Bank of Korea's current forecast assumes that the heightened uncertainty at the end of the fourth quarter last year will continue into the first quarter and gradually resolve from the second quarter. Director Lee emphasized, "The impact on the growth rate can vary depending on how long political factors persist," and "ensuring that economic policies operate normally, separate from politics, is essential to securing trust in the Korean economy externally."

The timing of additional government economic stimulus and the speed of the newly inaugurated Trump administration's protectionist policy implementation were also presented as important considerations. The Bank of Korea believes that if a supplementary budget is quickly organized through an agreement between the ruling and opposition parties, or if the Trump administration adjusts the speed of tariff policy implementation, a significant portion of the downward pressure on the economy will be alleviated.

Kang Jin-kyu Reporter josep@hankyung.com