🚨 Bank of Korea Warns of Negative Growth Rather Than Growth...May Rate Cut Likely

Today Korean Economic News | 2025.04.18

📌 Bank of Korea Lowers Economic Growth Forecast...Signals Interest Rate Cut

💬 The Bank of Korea is expected to lower its growth forecast for this year to 1.1-1.2% in its revised economic outlook to be announced in May. This is a significant downward adjustment from the 2.1% forecast in February. In particular, the possibility of negative growth (contraction) in the first quarter has been raised, and downward pressure on the economy has increased with the added risk of high tariffs imposed by the United States. As a result, the possibility of a key interest rate cut in May has also increased, but it is understood that the Bank of Korea is not considering returning to ultra-low interest rates in the 1% range.

1️⃣ Easy Understanding

The Korean economy is in a more difficult situation than expected. The Bank of Korea (BOK) is likely to significantly lower its economic growth forecast for this year compared to previous expectations. Let me explain why this is happening and how it might affect our lives.

In February, the Bank of Korea forecast that the Korean economy would grow by 2.1% this year. However, as the economic situation has worsened, the new forecast to be announced in May is expected to lower the growth rate to 1.1-1.2%. This is about half of the original expectation.

What's particularly concerning is that there's a high possibility that the Korean economy experienced negative growth (contraction) in the first quarter (January-March) of this year. Although exports have shown recovery since the beginning of the year, domestic demand (consumption and investment within the country) has significantly contracted. The situation has become even more difficult with the recent strengthening of U.S. protectionist trade policies that may impose high tariffs on Korean products.

To improve this economic situation, the Bank of Korea is increasingly likely to cut interest rates in May. Lowering the current base rate of 3.25% would reduce loan interest rates, which would help households and businesses by reducing their financial burden and encouraging consumption and investment. However, it is understood that the Bank of Korea is not considering lowering rates to the ultra-low level in the 1% range.

When economic growth slows, job creation decreases and household income stagnates. Corporate performance may also deteriorate, leading to a sluggish stock market. However, interest rate cuts have the positive effect of reducing the burden of loan interest. The government and the Bank of Korea are preparing various policies to overcome these difficult circumstances, and economic participants also need to manage risks while seeking new opportunities.

2️⃣ Economic Terms

📕 Economic Growth Rate

Economic growth rate shows how much a country's economy has expanded over a certain period.

• It is mainly measured by the growth rate of real Gross Domestic Product (GDP) and indicates the speed of a country's economic growth.
• Generally, developed countries show growth rates of 2-3%, while emerging countries show 5-7%.

📕 Base Rate

The base rate is the reference interest rate applied when the central bank (Bank of Korea) lends funds to commercial banks.

• It serves as the standard for market interest rates; when it increases, loan rates rise, and when it decreases, loan rates fall.
• It tends to be increased during economic overheating and decreased during economic downturns.

📕 Negative Growth

Negative growth (or contraction) is when the size of the economy shrinks compared to the previous period.

• It is characterized by a negative economic growth rate and is one of the main signals of an economic recession.
• When negative growth continues for two consecutive quarters, it is generally defined as a recession.

📕 Domestic Demand

Domestic demand refers to the purchase of goods and services within a country by domestic consumers and businesses.

• It consists of private consumption and investment, and along with exports, forms the two pillars of economic growth.
• When domestic demand contracts, it negatively impacts the overall economy, leading to job losses and income stagnation.

3️⃣ Principles and Economic Outlook

💡 Background and Impact of Downward Adjustment in Economic Growth Rate

• Let's examine the background of the Bank of Korea's significant lowering of its growth forecast and its impact on the economy.

  • First, economic indicators for the first quarter were worse than expected. Despite export recovery, the domestic economy in the first quarter likely experienced negative growth due to deepening domestic demand contraction. Retail sales decreased consecutively in January and February, with minimal recovery in March. Consumer sentiment has significantly contracted due to stagnant household incomes, interest rate burdens, and a slumping real estate market. Equipment investment was generally sluggish except in the IT sector, and construction investment recovery has been delayed due to the housing market slump. Exports increased by 14.7%, centered on semiconductors, but this was insufficient to offset the weakness in domestic demand. This sluggishness can be seen as the result of the "three highs" (high interest rates, high prices, high exchange rates) that have intensified since last year.

  • Second, uncertainty in the external economic environment has increased. In particular, the strengthening of U.S. protectionist trade policies poses a significant risk to the export-dependent Korean economy. The U.S. has indicated the possibility of imposing a 25% tariff on Korean products, which could directly impact Korea's main export items such as automobiles, semiconductors, and steel. The reignition of U.S.-China trade conflicts is also a concern. Additionally, increased volatility in international oil prices due to heightened geopolitical tensions in the Middle East and instability in global financial markets are factors that weaken investment sentiment. These external risks are likely to constrain economic growth by weakening export momentum and delaying corporate investment decisions.

  • Third, the decline in growth rate causes various economic ripple effects. It first has a negative impact on the job market. If the growth rate falls to the 1% range, job creation may slow down and the unemployment rate may rise. The employment situation for vulnerable groups, especially young people and temporary/daily workers, could worsen further. It can also lead to a vicious cycle of further contraction in consumption and investment due to stagnant household incomes and deteriorating corporate performance. From a fiscal perspective, there are concerns about worsening fiscal soundness due to decreased tax revenue and increased welfare expenditures. In financial markets, negative impacts such as declining corporate values and increased credit risks may appear, and pressure on the Korean won's value may increase.

• The Bank of Korea's downward adjustment of its growth forecast reflects the deterioration of domestic and international economic environments, which is characterized not as a short-term economic fluctuation but as a structural problem. Structural factors such as declining productive population due to low birthrates and aging, weakened competitiveness of key industries, and a slumping real estate market are weakening growth potential. This is a time when active policy responses from the government and the Bank of Korea, along with a long-term approach to improving the economic constitution, are needed.

💡 Possibility of Interest Rate Cut and Its Impact

• Let's analyze the possibility of a Bank of Korea interest rate cut and its impact on economic participants.

  • First, the possibility of a May interest rate cut has increased as concerns about economic recession have grown. The current Bank of Korea base rate is 3.25%, which has been maintained for over a year since January last year. However, with the significant downward adjustment of the economic growth forecast and the possibility of first-quarter negative growth, the necessity for an interest rate cut has increased. In particular, as the inflation rate has stabilized to the low 2% range, conditions for an interest rate cut are being created. With the U.S. Federal Reserve (Fed) expected to begin interest rate cuts from June this year, the Bank of Korea is under pressure to respond preemptively. However, it is understood that the Bank of Korea prefers a gradual and cautious approach rather than a significant interest rate cut in a short period and is not considering a return to ultra-low interest rates in the 1% range.

  • Second, interest rate cuts have various impacts on households, businesses, and financial markets. For households, the burden of loan interest decreases. With household debt exceeding 1,800 trillion won, an interest rate cut can lead to increased disposable income by easing the burden of principal and interest repayments. Households with a high proportion of variable-rate loans and multiple debtors can particularly benefit. For businesses, reduced funding costs can expand investment and employment capacity. The real estate market may show gradual recovery due to falling mortgage loan rates. In financial markets, bond price increases and stock market activation effects are expected. However, it takes time for interest rate cuts to lead to economic recovery, and side effects such as increased household debt and asset price bubbles must also be considered.

  • Third, interest rate policy alone has limitations, necessitating various complementary policies. While interest rate cuts have the effect of easing the financial burden on economic participants in the short term, they have limitations in solving structural problems. In particular, as the current Korean economy is affected by complex factors such as not only lack of demand but also declining productivity, population decrease, and weakened industrial competitiveness, various complementary policies along with interest rate policy are needed. From a fiscal policy perspective, consumer activation policies to stimulate domestic demand, expanded support for vulnerable groups, and investments to strengthen industrial competitiveness are required. Also important are mid- to long-term approaches such as improving productivity through structural reforms, fostering new industries through regulatory relaxation, and enhancing labor market flexibility. Ultimately, interest rate cuts are a necessary condition for economic recovery but not a sufficient one, and a combination of various policy tools is important.

• The Bank of Korea's interest rate cut appears to be an inevitable choice in response to concerns about economic recession, but adjusting the timing and speed is important to maximize its effect. Also, since interest rate cuts alone cannot solve the structural problems of the Korean economy, the government's active fiscal policies and structural reforms must be pursued in parallel. Finding a balance between financial stability and economic growth is a key challenge for strengthening the resilience of the Korean economy and ensuring sustainable growth.

💡 Response Strategies by Economic Participants

• Let's examine how households, businesses, and investors should respond in a low-growth era.

  • First, households should focus on strengthening financial soundness and risk management. As a low-growth and low-interest rate trend is expected, households should pay particular attention to debt management. Rather than increasing loans based on expectations of interest rate cuts, it is advisable to focus on improving the structure of existing debt. It is necessary to convert variable-rate loans to fixed-rate loans or review loan repayment plans. It is also good to secure sufficient emergency funds in preparation for rapid economic changes and adjust consumption to focus on necessities. In terms of investment, consider a strategy of maintaining the principle of diversification while increasing the proportion of assets that generate stable cash flow. Especially in a low-growth era, asset allocation from a long-term perspective is more important than short-term returns, and an approach that gradually expands the proportion of investments in future growth industries such as the digital economy, eco-friendly energy, and healthcare can be effective.

  • Second, businesses should focus on operational efficiency and strengthening innovation capabilities. With increased possibility of economic recession, businesses primarily need to optimize their cost structures and focus on securing cash. It is important to restructure existing debt using the interest rate cut period and strengthen financial soundness through the sale of unnecessary assets. A balanced approach is needed to focus on core businesses while maintaining and expanding R&D investments for discovering new businesses. Investments in securing future growth engines such as artificial intelligence, eco-friendly technology, and digital transformation should continue even during economic downturns. Also, risk management strategies such as diversifying production bases, localizing core parts, and diversifying markets should be strengthened in preparation for external environmental changes such as global supply chain reorganization and strengthened protectionism. Improving productivity through talent acquisition and organizational culture innovation is also an important task.

  • Third, investors need to readjust their portfolios in preparation for increased uncertainty. In a low-growth and low-interest rate environment, modification of traditional investment approaches is inevitable. Bond investors can consider a strategy of expanding the proportion of long-term bonds when the interest rate cut cycle begins. Stock investors need to increase the proportion of defensive stocks and dividend stocks, while also paying attention to sectors expected to show structural growth, such as AI, biotech, and eco-friendly energy. It is also important to disperse domestic economic recession risks through global diversification of investments. For alternative investments (real estate, infrastructure, private equity funds, etc.), a cautious approach considering the connection with the real economy is needed. Above all, as the short-term volatility of the market is likely to increase, a calm approach is needed that sets a long time horizon for investments and avoids panic selling.

• The downward adjustment of Korea's economic growth forecast and the possibility of interest rate cuts signify a change in the management environment for all economic participants. In these changes, households, businesses, and investors all need balanced strategies for short-term risk management together with capturing long-term opportunities. In particular, preparation from a mid- to long-term perspective considering megatrends such as digital transformation, transition to an eco-friendly economy, and demographic changes is important.

4️⃣ In Conclusion

The Bank of Korea is expected to significantly lower its economic growth forecast for this year from the previous 2.1% to 1.1-1.2%. This reflects the deterioration of domestic and international economic environments, including the possibility of negative growth in the first quarter, prolonged domestic demand contraction, and strengthened U.S. protectionist trade policies. What is particularly concerning is that this growth slowdown is intertwined with structural problems such as low birthrates and aging, declining productivity, and weakened competitiveness of key industries, rather than being a short-term economic fluctuation.

In this situation, the Bank of Korea has increased the likelihood of cutting interest rates in May. Lowering the current base rate of 3.25% would reduce the interest burden on households and businesses, expanding their capacity for consumption and investment. However, it is understood that the Bank of Korea prefers a gradual and cautious approach rather than a rapid interest rate cut, and is not considering a return to ultra-low interest rates in the 1% range.

While interest rate cuts help revitalize the economy, their effects may be limited. This is because the problems facing the Korean economy are strongly structural and difficult to solve with interest rates alone. Therefore, the government's active fiscal policies, regulatory reforms, and support for strengthening industrial competitiveness must be pursued in parallel.

Households, businesses, and investors also need strategic approaches in preparation for a low-growth era. Households should focus on strengthening financial soundness and risk management, businesses on optimizing cost structures and strengthening innovation capabilities, and investors on portfolio diversification and long-term investment perspectives.

Ultimately, while the current economic situation is challenging, opportunities exist within the crisis. This is an important time to improve the constitution of the Korean economy and secure new growth engines through digital transformation, transition to an eco-friendly economy, and fostering new industries. If the government, businesses, and households work together to overcome the crisis and prepare for the future, the Korean economy can turn this challenge into an opportunity for a new leap forward.