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By Aubrey Kim, New York Correspondent
Global Investment Bank Morgan Stanley Issues Warning for Korean Economy
Global investment bank Morgan Stanley has projected that the Bank of Korea (BoK) will lower its benchmark interest rate from 2.75% to 2.5% at the upcoming Monetary Policy Board meeting on May 29. At the same time, it is expected to sharply downgrade its 2025 GDP growth forecast from the previous 1.5% to between 1.0% and 1.1%. This outlook reflects a confluence of worsening domestic and global economic conditions, sluggish domestic demand, and weak exports.
Background Behind the Rate Cut: Economic Slowdown and Domestic Demand Slump
In a recent report, Morgan Stanley stated, “The Bank of Korea is likely to cut the benchmark rate by 25 basis points to 2.5% at the May 29 meeting.” This expectation has already been widely shared among market analysts. A survey of macroeconomic and bond experts from 11 domestic securities firms also showed unanimous predictions for a rate cut at this meeting.
Concerns about a slowdown in economic activity underpin this near-consensus. In April, the BoK kept rates unchanged, warning that Q1 GDP growth might turn negative and that annual growth could fall below 1.5%. Indeed, Korea’s GDP contracted by 0.2% in Q1 2025 compared to the previous quarter, marking the fourth consecutive quarter of near-zero or negative growth since Q2 2024.
Growth Forecast Downgrade: Down to the Low 1% Range
Morgan Stanley has revised its 2025 GDP forecast for South Korea from 1.5% to 1.0–1.1%, lower than estimates from major global institutions like the IMF and OECD (both at 1.5%). Korea Development Institute (KDI), a state-run think tank, also slashed its projection to just 0.8%.
This downgrade is attributed to a combination of factors including weak domestic demand, declining exports, a slump in the construction sector, and a worsening global trade environment. Semiconductor exports to China, for example, plummeted 23.5%, hitting a nine-year low amid escalating U.S.-China trade tensions, U.S. tariffs on Chinese-bound chips, and China’s push for semiconductor self-sufficiency.
Key Risk Factors: External Uncertainty and Policy Gaps
External uncertainties surrounding the Korean economy remain significant. These include heightened U.S. tariffs on Chinese goods, a global trade slowdown, and renewed U.S.-China trade tensions—all directly affecting Korea’s export-driven economy. Compounding this is growing political uncertainty ahead of the June 3 snap election and recent resignations of key economic policymakers, raising concerns over a policy vacuum.
Morgan Stanley noted, “Due to political uncertainty and global trade changes, the BoK may have limited room to maneuver,” adding that a supplementary budget of around 20 trillion KRW will likely be needed in the second half of the year.
Market and Expert Reactions: Possibility of Further Cuts
Market experts see the upcoming rate cut as a signal for economic stimulus. However, many caution that monetary easing alone won’t be enough to resolve persistent weaknesses in domestic consumption, investment, and exports. Experts emphasized the need for additional policy support, with some predicting the benchmark rate could fall to 2.0% by late 2025 or early 2026.
Still, if the U.S. Federal Reserve delays its own rate cuts, risks of a weaker won and capital outflows may emerge. Thus, the BoK is expected to pace its rate cuts carefully while coordinating with fiscal measures such as the supplementary budget.
Sector-by-Sector Economic Impact
1. Domestic Consumption
Rate cuts could ease household debt servicing costs, potentially boosting consumption. However, given already high household debt levels, the effect may be limited. KDI forecasts private consumption growth of just 1.1% in 2025, with a sluggish recovery in consumer sentiment expected.
2. Investment and Construction
Construction investment is projected to shrink by 4.2% in 2025, following a decline in 2024. Factors include reduced new housing starts, a slumping real estate market, and tighter financing conditions. Corporate investment is also expected to weaken amid global demand slowdown and elevated uncertainty.
3. Exports
Export growth—particularly in semiconductors—faces multiple headwinds including U.S.-China trade conflict, global slowdown, and rising self-sufficiency in China. Notably, U.S. tariffs on China-bound chips are directly hurting Korea’s intermediate goods exports.
4. Employment and Inflation
Job creation is expected to slow to around 100,000 new positions due to weakening growth. The unemployment rate is forecast to rise slightly to 2.9%. Inflation, meanwhile, is projected to remain subdued at 1.6–1.9% due to weak domestic demand.
Outlook and Policy Challenges
Morgan Stanley anticipates that the base rate could be further lowered to 2.0% by year-end. However, rate cuts alone are unlikely to spark a strong economic rebound. Large-scale fiscal stimulus, such as a supplementary budget, will be necessary in the second half.
Experts stress the importance of addressing political uncertainty, responding quickly to shifts in the global trade environment, and advancing domestic reforms. Key structural challenges include export diversification, fostering new industries, and improving labor market flexibility.
Conclusion
If the BoK proceeds with both a rate cut and a downward revision of the growth outlook, as Morgan Stanley projects, it would mark South Korea’s entry into a “low growth, low interest rate” era. With economic momentum hard to come by in the near term, coordinated efforts across monetary, fiscal, and structural policy domains are critical. Resolving political uncertainties and preemptively adapting to global changes will be key to South Korea’s economic future.
Copyright © The Value Chain Times. All rights reserved. Unauthorized reproduction, redistribution, and use for AI training are strictly prohibited.
[The Value Chain Times = Aubrey Kim, New York Correspondent]
By Aubrey Kim, New York Correspondent
Global Investment Bank Morgan Stanley Issues Warning for Korean Economy
Global investment bank Morgan Stanley has projected that the Bank of Korea (BoK) will lower its benchmark interest rate from 2.75% to 2.5% at the upcoming Monetary Policy Board meeting on May 29. At the same time, it is expected to sharply downgrade its 2025 GDP growth forecast from the previous 1.5% to between 1.0% and 1.1%. This outlook reflects a confluence of worsening domestic and global economic conditions, sluggish domestic demand, and weak exports.
Background Behind the Rate Cut: Economic Slowdown and Domestic Demand Slump
In a recent report, Morgan Stanley stated, “The Bank of Korea is likely to cut the benchmark rate by 25 basis points to 2.5% at the May 29 meeting.” This expectation has already been widely shared among market analysts. A survey of macroeconomic and bond experts from 11 domestic securities firms also showed unanimous predictions for a rate cut at this meeting.
Concerns about a slowdown in economic activity underpin this near-consensus. In April, the BoK kept rates unchanged, warning that Q1 GDP growth might turn negative and that annual growth could fall below 1.5%. Indeed, Korea’s GDP contracted by 0.2% in Q1 2025 compared to the previous quarter, marking the fourth consecutive quarter of near-zero or negative growth since Q2 2024.
Growth Forecast Downgrade: Down to the Low 1% Range
Morgan Stanley has revised its 2025 GDP forecast for South Korea from 1.5% to 1.0–1.1%, lower than estimates from major global institutions like the IMF and OECD (both at 1.5%). Korea Development Institute (KDI), a state-run think tank, also slashed its projection to just 0.8%.
This downgrade is attributed to a combination of factors including weak domestic demand, declining exports, a slump in the construction sector, and a worsening global trade environment. Semiconductor exports to China, for example, plummeted 23.5%, hitting a nine-year low amid escalating U.S.-China trade tensions, U.S. tariffs on Chinese-bound chips, and China’s push for semiconductor self-sufficiency.
Key Risk Factors: External Uncertainty and Policy Gaps
External uncertainties surrounding the Korean economy remain significant. These include heightened U.S. tariffs on Chinese goods, a global trade slowdown, and renewed U.S.-China trade tensions—all directly affecting Korea’s export-driven economy. Compounding this is growing political uncertainty ahead of the June 3 snap election and recent resignations of key economic policymakers, raising concerns over a policy vacuum.
Morgan Stanley noted, “Due to political uncertainty and global trade changes, the BoK may have limited room to maneuver,” adding that a supplementary budget of around 20 trillion KRW will likely be needed in the second half of the year.
Market and Expert Reactions: Possibility of Further Cuts
Market experts see the upcoming rate cut as a signal for economic stimulus. However, many caution that monetary easing alone won’t be enough to resolve persistent weaknesses in domestic consumption, investment, and exports. Experts emphasized the need for additional policy support, with some predicting the benchmark rate could fall to 2.0% by late 2025 or early 2026.
Still, if the U.S. Federal Reserve delays its own rate cuts, risks of a weaker won and capital outflows may emerge. Thus, the BoK is expected to pace its rate cuts carefully while coordinating with fiscal measures such as the supplementary budget.
Sector-by-Sector Economic Impact
1. Domestic Consumption
Rate cuts could ease household debt servicing costs, potentially boosting consumption. However, given already high household debt levels, the effect may be limited. KDI forecasts private consumption growth of just 1.1% in 2025, with a sluggish recovery in consumer sentiment expected.
2. Investment and Construction
Construction investment is projected to shrink by 4.2% in 2025, following a decline in 2024. Factors include reduced new housing starts, a slumping real estate market, and tighter financing conditions. Corporate investment is also expected to weaken amid global demand slowdown and elevated uncertainty.
3. Exports
Export growth—particularly in semiconductors—faces multiple headwinds including U.S.-China trade conflict, global slowdown, and rising self-sufficiency in China. Notably, U.S. tariffs on China-bound chips are directly hurting Korea’s intermediate goods exports.
4. Employment and Inflation
Job creation is expected to slow to around 100,000 new positions due to weakening growth. The unemployment rate is forecast to rise slightly to 2.9%. Inflation, meanwhile, is projected to remain subdued at 1.6–1.9% due to weak domestic demand.
Outlook and Policy Challenges
Morgan Stanley anticipates that the base rate could be further lowered to 2.0% by year-end. However, rate cuts alone are unlikely to spark a strong economic rebound. Large-scale fiscal stimulus, such as a supplementary budget, will be necessary in the second half.
Experts stress the importance of addressing political uncertainty, responding quickly to shifts in the global trade environment, and advancing domestic reforms. Key structural challenges include export diversification, fostering new industries, and improving labor market flexibility.
Conclusion
If the BoK proceeds with both a rate cut and a downward revision of the growth outlook, as Morgan Stanley projects, it would mark South Korea’s entry into a “low growth, low interest rate” era. With economic momentum hard to come by in the near term, coordinated efforts across monetary, fiscal, and structural policy domains are critical. Resolving political uncertainties and preemptively adapting to global changes will be key to South Korea’s economic future.
Copyright © The Value Chain Times. All rights reserved. Unauthorized reproduction, redistribution, and use for AI training are strictly prohibited.
[The Value Chain Times = Aubrey Kim, New York Correspondent]