🚨 Bank of Korea Shocks with 0.8% Growth Forecast: Political Instability Hurts Economy

Today Korean Economic News | 2025.06.01

📌 Bank of Korea cuts growth forecast from 1.5% to 0.8%...First zero-level growth crisis in 27 years

💬 The Bank of Korea has drastically cut its 2025 economic growth forecast from 1.5% to 0.8%. This suggests Korea may record zero-level growth for the first time since the 1998 financial crisis (-5.5%), 2009 global financial crisis (0.8%), and 2020 COVID-19 pandemic (-0.7%). The Bank of Korea explained, "Weak exports due to US protectionism, domestic recession from high interest rates, and ongoing political uncertainty have all worked together." The analysis shows that political chaos over recent months has seriously damaged business and consumer confidence. This has led to growing calls for additional monetary policy easing and active government fiscal response.

1️⃣ Easy Understanding

The Bank of Korea has greatly lowered its prediction of how much our economy will grow this year. This is the lowest level in 27 years, showing that our economy is facing serious difficulties.

Economic growth rate simply means "how much our country's economy grew in one year." Usually, 2-3% growth means a healthy economy, but 0.8% means almost no growth at all.

The Bank of Korea lowered the growth forecast so much for several reasons. First, the US is putting high taxes on Korean products, so our exports are decreasing. Second, high interest rates make it hard for people to borrow money, leading to less spending and investment. Third, ongoing political instability makes companies delay investments and consumers close their wallets.

Looking at past cases helps us understand what zero-level growth means. During the 1998 financial crisis, the economy shrank by -5.5%. During the 2009 global financial crisis, it was 0.8% with almost no growth. During COVID-19 in 2020, the economy shrank by -0.7%. The current situation is similar to those times.

Political uncertainty especially has a big impact on the economy. When politics are unstable, companies hesitate to make new investments, and consumers reduce spending because they worry about the future. Foreign investors also avoid investing in Korea.

But we don't need to despair. The Bank of Korea can lower interest rates to boost the economy, and the government can increase spending to revive the economy. The important thing is to restore political stability and have all economic players work together to overcome the crisis.

These are difficult times, but with proper policy responses and social efforts, we can return to a growth path.

2️⃣ Economic Terms

📕 Economic Growth Rate

Economic growth rate shows how much a country's economy has grown compared to the previous year.

• It's measured by the increase in real Gross Domestic Product (GDP), showing real growth after removing inflation effects.
• Developed countries usually record 2-3% growth, while developing countries record 4-6% growth.
• Growth rates under 1% are seen as recession signals.

📕 Monetary Policy

Monetary policy means the central bank manages the economy by controlling interest rates.

• When the economy is bad, they lower rates to make borrowing easier and increase investment and spending.
• When inflation is high, they raise rates to prevent economic overheating.
• The Bank of Korea handles our country's monetary policy.

📕 Domestic Demand

Domestic demand refers to all consumption and investment happening within the country.

• It includes personal consumption, business investment, and government spending.
• Strong domestic demand creates an economic structure resistant to external shocks.
• Weak domestic demand is a major sign of economic downturn.

📕 Political Uncertainty

Political uncertainty means political situations are unstable, making the future hard to predict.

• Elections, political conflicts, and policy changes are main causes.
• It leads to reduced business investment and lower consumer confidence.
• It's an important factor that negatively affects economic growth.

3️⃣ Analysis and Economic Outlook

✅ Background of Bank of Korea's Growth Forecast Cut

• Let's analyze why the Bank of Korea drastically lowered its growth forecast and what it means.

  • First, worsening external conditions are the main cause of lower growth. The Trump administration's stronger protectionism is directly hitting Korean exports. The US imposed 25% high tariffs on Korean products, seriously affecting major export items like cars, semiconductors, and steel. Actually, exports to the US in the first quarter dropped 15% compared to the same period last year, and total export growth was only 2.1%. China's delayed recovery is also a burden. China is Korea's biggest trading partner, but demand for Korean products is decreasing due to real estate market slump and weak domestic consumption. The Bank of Korea explained, "Export recovery is slower than expected due to global trade slowdown and spreading protectionism."

  • Second, domestic recession from high interest rates is holding back growth. The current Bank of Korea base rate is 3.5%, which is 2.25 percentage points higher than two years ago. This has greatly increased the debt burden on households and businesses. Household debt interest burden exceeds 50 trillion won annually, leading to reduced disposable income and weaker consumption. Companies are also delaying investments due to high funding costs. First quarter facility investment dropped 8.2% compared to the same period last year, and construction investment also fell 3.1%. Private consumption only grew 0.1%, practically stagnant. The Bank of Korea diagnosed, "Domestic recovery is slower than expected as high interest rates continue."

  • Third, political uncertainty has seriously worsened economic sentiment. Political chaos over recent months has dealt a fatal blow to business and consumer confidence. Consumer confidence index fell from 91.2 in March to 85.7 in May, and business sentiment index also dropped from 78 to 72 during the same period. Political instability has caused foreign investors to leave the Korean market. Foreign stock net selling exceeded 5 trillion won in May, and the won continues to weaken. Especially, companies delaying new investments or business expansion has greatly reduced economic vitality. A Bank of Korea official emphasized, "Restoring political stability is a prerequisite for economic recovery."

• The Bank of Korea's growth forecast cut shows that complex domestic and external crises are becoming reality. Both the vulnerability of export-dependent economic structure and weak domestic foundation are being exposed simultaneously, greatly reducing economic resilience.

✅ Economic Impact of Zero-Level Growth Rate

• Let's examine the impact of zero-level growth rate on the overall economy and concerning problems.

  • First, job market deterioration and rising unemployment are inevitable. When economic growth almost stops, companies reduce hiring and start restructuring to cut costs. The Bank of Korea forecast unemployment would rise to 3.8% this year, which is 1.1 percentage points higher than last year's 2.7%. Youth unemployment is likely to exceed 10%. Self-employed and small business owners will also face increased difficulties. With domestic demand slump reducing sales while rent and labor costs remain the same, more business owners are considering closing. Actually, business closure reports in the first quarter increased 15% compared to the same period last year. This is a serious problem that could lead to social unrest and worsening income inequality.

  • Second, the vicious cycle of reduced household income and weaker consumption will intensify. When household real income decreases due to rising unemployment and slower wage growth, consumption weakens further. The Bank of Korea forecast private consumption growth at 0.3% this year, which is practically no growth. Reduced consumption leads to lower corporate sales, creating a vicious cycle that shrinks the entire economy. Especially, durable goods and service industry consumption are expected to be hit hard. Sales of cars and home appliances will decrease, and difficulties in dining, travel, and cultural service industries will worsen. This could lead to employment reduction in related sectors, further deepening overall economic recession.

  • Third, weakened government fiscal capacity and increased social security burden are concerning. When economic growth rate falls, tax revenue decreases, greatly limiting government fiscal capacity. Meanwhile, social security costs like unemployment benefits and welfare spending increase, adding to fiscal burden. The Ministry of Economy and Finance announced that this year's tax revenue is expected to fall short of initial forecasts by over 20 trillion won. This makes it difficult for the government to pursue fiscal expansion for economic stimulus. Also, if low growth continues, social insurance finances like pensions and health insurance could worsen. With declining working-age population and aging progressing, if economic growth also slows, serious problems could arise in the sustainability of the social security system.

• Zero-level growth rate is a serious situation that could lead to overall social vitality decline and future growth foundation damage, beyond simple economic recession. Swift policy response and structural improvement are needed.

✅ Policy Response Direction and Economic Recovery Outlook

• Let's analyze policy response measures for economic recovery and future outlook.

  • First, additional interest rate cuts by the Bank of Korea seem inevitable. The current 3.5% base rate is likely to be lowered to 2.5-3.0% level within this year. However, gradual cuts are expected considering interest rate differences with the US and exchange rate stability. The Bank of Korea stated, "If price stability trend continues and the need for economic stimulus grows, we will operate monetary policy in an accommodative manner." Interest rate cuts have the effect of reducing interest burden on households and businesses, increasing consumption and investment. However, in a situation where debt has already accumulated a lot, interest rate cuts alone may have limited economic stimulus effects, so combination with other policies is important.

  • Second, active fiscal expansion by the government is needed. Through supplementary budget formation, SOC investment expansion, small business support, and job creation projects should be pursued. Especially, consumption coupons and expanded tax benefits to boost domestic demand could be effective. The government is reportedly considering a 30 trillion won supplementary budget. However, considering fiscal soundness, focus should be on efficient spending. Rather than simple cash distribution, investing in future growth engine development and structural improvement is important. Examples include digital transformation, eco-friendly investment, and education and training enhancement.

  • Third, restoring political stability is a prerequisite for all policies. No matter how good economic policies are introduced, their effects are halved if political uncertainty continues. The ruling and opposition parties should cooperate to handle economic issues as priority and refrain from unnecessary political conflicts. Especially, maintaining consistent policies so businesses and investors can predict the future is important. Political stability is also essential for attracting foreign investment. Experts emphasize, "The political circle should reach social consensus on economic recovery and engage in bipartisan cooperation."

• For economic recovery, monetary policy, fiscal policy, and political stability must work in harmony. Sustainable recovery is possible only when short-term prescriptions are combined with structural improvements for medium to long-term growth foundation development.

4️⃣ Conclusion

The Bank of Korea's 0.8% growth forecast cut is a strong warning signal showing our economy faces serious crisis. The possibility of recording zero-level growth for the first time in 27 years since the 1998 financial crisis means structural problems are working together beyond simple cyclical recession.

Three negative factors - weak exports, domestic recession, and political uncertainty - are simultaneously pressuring our economy. US protectionism and China's economic slowdown are directly hitting Korea's export-centered economy, while high interest rates are blocking domestic recovery. Additionally, ongoing political chaos is destroying business and consumer confidence, reducing overall economic vitality.

But we don't need to despair. We have experience overcoming bigger crises in the past. The important thing is to acknowledge the seriousness of the current situation and mobilize all policy tools to respond to the crisis. Interest rate cuts by the Bank of Korea, fiscal expansion by the government, and cooperation by political parties must work in harmony.

Especially, restoring political stability is urgent. No matter how good economic policies are introduced, their effects will be halved if political uncertainty continues. It's time for ruling and opposition parties to cooperate in a bipartisan manner and focus on economic recovery.

Individuals and businesses also need preparation for difficult times. Households should reduce unnecessary spending and maintain fiscal soundness, while businesses should pursue efficiency improvements along with balanced investment for future competitiveness.

Crisis is also opportunity. If we strengthen our economic constitution and discover new growth engines through this difficulty, we can become a more solid and sustainable economy. Now is the time for all economic players to join forces and turn crisis into opportunity.