Bank of Korea Raises This Year's Growth Forecast to 3.3%...Ups Next Year by 0.8 Points (Updated)

Upward Revision of 0.7 Percentage Points in Three Months
Next Year's Growth Rate Also Raised to 2.9%

Inflation Outlook Maintained at 2.7% for This Year... 2.3% for Next Year

The Bank of Korea has significantly raised its economic growth outlook for South Korea this year to 3.3%. The central bank’s judgment is based on the expectation that the booming semiconductor cycle, which has entered a super-cycle, will not only drive exports but also investment and private consumption, thereby strongly boosting overall growth.

In its revised economic outlook released on August 27, the Bank of Korea projected this year’s real gross domestic product (GDP) growth rate at 3.3%. This is a 0.7 percentage point increase from its previous forecast of 2.6% in May. For next year, the bank raised its projection from 2.1% to 2.9%, an even larger 0.8 percentage point increase.

The 3.3% growth rate for this year surpasses projections from the Korea Development Institute (KDI, 3.2%), the government (3.0%), the International Monetary Fund (IMF, 2.6%), and the Organization for Economic Cooperation and Development (OECD, 2.6%).

The Bank of Korea’s significant upward revision of its annual growth forecast is due to the economy’s stronger-than-expected performance, with robust growth momentum continuing into the second quarter. In its May outlook, the central bank had projected quarter-on-quarter growth of 0.2% for the second quarter, but the actual figure came in at 0.6%—triple its forecast. Despite the base effect from high first-quarter growth (1.8%) and inflationary pressures from the Middle East war, the semiconductor sector provided a much stronger boost, offsetting downward pressure on growth. As a result, even if average growth in the second half were just -0.1% quarter-on-quarter, the annual growth could still reach 3%.

The fact that the Bank of Korea is forecasting an even higher rate of 3.3% suggests it expects the growth trend to continue without turning negative in the second half of the year. In fact, export data shows that record-high performances, led by semiconductors, have continued into the second half. According to the Korea Customs Service, July exports reached USD 98.89 billion, up 62.8% from a year earlier. This marks the second-highest figure on record, following the all-time high of USD 102.2 billion in June. Semiconductor exports soared to USD 41.2 billion in July, a 176.3% year-on-year jump, driving the overall increase.

Exports from August 1 to 20 also reached USD 55.2 billion, the highest figure for this period in history. In particular, semiconductor exports during this period surged 198.8% to USD 26 billion, accounting for 47.2% of total exports.

The background for the upward revision also includes fierce competition among related companies, which are making large-scale facility investments to meet the soaring demand for AI semiconductors. The Bank of Korea is also paying attention to the virtuous cycle where semiconductor-led economic growth translates into increased household income and, in turn, consumption recovery.

Private consumption has slowed somewhat compared to the second quarter but remains on an improvement trend. According to the Credit Finance Association, last month’s total value of domestic card approvals rose 3.7% year-on-year. The Bank of Korea’s Consumer Composite Sentiment Index (CCSI) for August stood at 104.5, down 2.3 points from the previous month but still above the baseline of 100. A CCSI reading above 100 indicates consumer sentiment is more optimistic than the long-term average.

If the revised outlook is realized and South Korea’s economic growth rate exceeds 3% this year, it would be the first time since 2021 (4.7%) in five years. Notably, while the 2021 rate was a special case—reflecting a base effect from the previous year’s negative growth (-0.7%) caused by the COVID-19 shock and a large fiscal stimulus by the government to overcome it—this year’s result can be interpreted as a testament to the economy’s own resilience, driven by a semiconductor boom.

However, there are still factors that could place downward pressure on growth. First, the second-round effects of high oil prices due to the Middle East war could increasingly spill over into production and services in the second half. At the same time, persistent geopolitical uncertainties in the region are causing oil prices to rise again, which poses risks not only for growth but also for price stability.

Inflationary pressure remains ongoing. In its August outlook, the Bank of Korea maintained its projection for consumer price inflation at 2.7% for this year and 2.3% for next year. Both figures remain above the central bank’s inflation target of 2.0% for this year and next year.

This content was produced with the assistance of AI translation services.