The Bank of Korea’s economic growth forecasts for this year have repeatedly missed the actual trajectory of the South Korean economy. The central bank conservatively factored in the AI-driven semiconductor super-boom while overestimating downside risks to growth from the Middle East conflict. Attention is now focused on the likelihood of a significant upward revision to this year’s growth forecast in the August economic outlook scheduled for release on the 27th.
According to the Bank of Korea on the 21st, the central bank projected real GDP growth of 2.0% for this year in its February economic outlook. In May, it raised the figure to 2.6%. However, actual growth momentum has been far steeper than the Bank of Korea anticipated. First-quarter GDP grew 1.8% quarter-on-quarter, double the February forecast of 0.9%. Second-quarter growth also came in at 0.6%, exceeding the late-May forecast of 0.2% by 0.4 percentage points. The gap between forecasts issued just over a month before quarter-end and actual economic performance has been persistently wide.
By sector, the Bank of Korea expected goods exports to decline 1.6% quarter-on-quarter in the second quarter, but they actually rose 1.0%. Facility investment was forecast to fall 0.5% but instead grew 0.2%. Semiconductor exports and investment proved far stronger than expected, driven by expanding AI-related demand. Construction investment, however, underperformed the central bank’s expectations. The Bank of Korea projected a 0.6% increase in second-quarter construction investment, but it actually contracted 0.2%.
According to the Center for International Finance, when the Bank of Korea released its May forecast, the average growth projection for South Korea among eight major global investment banks stood at 2.8%. Bank of America (3.1%), JPMorgan (3.0%), and Citi (3.0%) had already issued forecasts in the 3% range.
Market observers expect the Bank of Korea to raise this year’s growth forecast to at least the low 3% range on the 27th. Simply applying the Bank of Korea’s May projections for the third quarter (0.0%) and fourth quarter (0.4%) to the actual first- and second-quarter results yields an annual growth estimate of approximately 3.2%—a 0.6 percentage point difference from the May figure. Sources indicate that some within the Bank of Korea believe a figure in the high 3% range may even be possible.
As of late last month, the average growth forecast for South Korea among eight major global investment banks was 3.2%. JPMorgan (3.8%) and Citi (3.7%) have already issued forecasts in the high 3% range. Moody’s recently adjusted its projection from 1.8% to 3.5%. Against this backdrop, observers note that the Bank of Korea’s upward revision will be hard-pressed to avoid criticism of being a “lagging forecast.”
In a survey conducted by Asia Economic Daily from the 18th to the 21st of this month among 14 domestic and international economic experts, all respondents predicted that South Korea’s economic growth rate would exceed 3.0% this year. Specifically, 3.2% and 3.4% each drew three responses, followed by 3.3% with two. Three respondents projected growth in the 3.6–3.8% range. All respondents also expected the Bank of Korea to raise its growth forecast for this year into the 3% range in its August economic outlook.
Experts assessed that the semiconductor super-cycle will improve not only exports but also domestic demand. Ahn Jae-kyun, a researcher at Korea Investment & Securities, said, “Annual growth in the 3% range will be comfortably achieved, driven by semiconductor-led export strength, facility investment amid improving income conditions, and expanded government spending.” Han Jun-hee, a senior researcher at NH Investment & Securities’ research institute, also projected that “semiconductor-centered exports and facility investment strength will drive stronger-than-expected growth.”
Regarding next year’s growth rate, 9 out of 12 respondents (75%) forecast a range of 2.3–2.5%. The most common projection was 2.5% (four respondents), followed by 2.4% (three) and 2.3% (two). The remaining three respondents expected growth to again exceed 3.0% next year, citing the view that the semiconductor boom’s spillover into domestic demand will materialize in earnest, sustaining above-potential growth.
On the inflation front, a majority of experts predicted that this year’s core inflation rate will exceed the Bank of Korea’s May forecast of 2.4%. The most common projection was 2.5% (four respondents), followed by 2.6% (three). Core inflation is also expected to decline slowly next year. Six out of ten respondents forecast that core inflation will exceed headline consumer price inflation next year. The analysis points to rising petroleum product prices amid high oil prices, IT product price increases driven by semiconductor price hikes, and semiconductor-led income improvements translating into consumption recovery as factors pushing core inflation higher.
The Bank of Korea’s forecast errors are not limited to this year. Its fourth-quarter GDP growth forecast last year was 0.2%, but the actual preliminary figure was -0.3%. Growth in the first quarter of 2024 came in at 1.3%, far exceeding the Bank of Korea’s forecast of 0.5%, while third-quarter growth that same year was just 0.1%, significantly below the projected 0.5%.
Economic forecasting inherently involves uncertainty. The Bank of Korea maintains that how forecasts are revised in response to economic developments matters more than the forecast figures themselves. Former Bank of Korea Governor Rhee Chang-yong has previously explained the limitations of forecasting, noting that forecast revisions are common among overseas central banks as well. However, with forecast errors recurring, voices arguing that post-hoc revisions alone cannot avoid the “lagging forecast” criticism continue to grow. Concerns are particularly mounting because the Bank of Korea’s economic outlook serves as a key basis for monetary policy decisions on the benchmark interest rate, requiring greater precision.
Within and outside the Bank of Korea, there are calls to strengthen analytical capabilities and expert staffing for the semiconductor industry, given the growing impact of the AI investment cycle on South Korea’s exports, facility investment, and growth rate. A university professor who formerly worked at the Bank of Korea said, “The recent forecast errors stem from failing to adequately capture the semiconductor industry’s entry into a full-fledged boom,” adding that “there is a need to strengthen related capabilities, including recruiting experts who can precisely analyze and forecast cyclical changes in the semiconductor industry that drives the South Korean economy.”