Global investment banks (IBs) are slashing their growth forecasts for South Korea, citing weakened consumer sentiment and economic downturn following President Yoon Suk-yeol’s short-lived martial law declaration in December. Some banks predict Korea’s annual growth for this year in the low 1% range, raising concerns that the country may be slipping into a prolonged period of low growth.
Experts are calling on the government to support the economy through a comprehensive policy response, using both fiscal and monetary measures, including a supplementary budget and interest rate cuts.
Global research firm Capital Economics projected South Korea’s economic growth at 1.1% for this year, according to the Korea Center for International Finance (KCIF) on Feb. 10. This figure is the lowest forecast among major investment banks, and more than half a percentage point lower than the Bank of Korea’s latest 1.6–1.7% growth estimate.
Other banks and institutions have revised their growth outlook for South Korea. JPMorgan lowered its forecast by 0.1 percentage points to 1.2%, while Citibank slashed its projection by 0.2 percentage points to 1.4%. These figures fall below the 1.7% average growth forecast issued by eight leading investment banks, including Barclays, Bank of America, Citigroup, Goldman Sachs, JPMorgan, HSBC, Nomura, and UBS, at the end of December last year.
With South Korea’s potential growth rate—the rate of growth that an economy can sustain over the medium term without generating excess inflation—estimated at 2.0%, the latest projections indicate that actual growth could drop to nearly half of its potential. In the long term, this trend signals declining productivity and a heightened risk of recession.
The growing pessimism among investment banks reflects mounting concerns about South Korea’s economic resilience. Credit ratings agency Moody’s recently warned that prolonged political instability in South Korea could negatively impact the country’s sovereign credit rating. S&P also said that political turmoil is dampening sentiment and activity in the real estate market.
Experts point to weakening exports as another factor hindering growth potential. Barclays expects sluggish exports in the first half of the year due to the semiconductor market downturn and U.S. President Donald Trump’s tariff policies. Citibank noted that Korea’s export momentum has been weaker than expected, while HSBC cautioned that the country’s export conditions could deteriorate further.
“The negative outlook from foreign investment banks is likely based on South Korea’s recent slowdown in growth and rising external risks in the export sector after Donald Trump was elected U.S. president,” said Cho Yong-gu, a fixed-income analyst at Shinyoung Securities. “Some worry that the country’s credit rating outlook could be downgraded from ‘positive’ to ‘negative’ following the martial law incident, further dampening investor sentiment towards Korea.”
As foreign investors grow increasingly concerned about Korea’s growth prospects, the government is stepping up efforts to maintain investor confidence. Acting President and Minister of Economy and Finance Choi Sang-mok announced that the government plans to hold an investor relations (IR) event this month to reassure overseas investors of South Korea’s economic stability.
However, some argue that more decisive policy actions are needed to prevent a recession. A supplementary budget and increased fiscal spending have been proposed as possible solutions. Last month, BOK Governor Rhee Chang-yong suggested a supplementary budget of 15 trillion to 20 trillion won ($10 billion to $13.8 billion) to offset external shocks to growth.
Calls for rate cuts are also growing. The minutes from the BOK’s first monetary policy meeting of the year, held on Jan. 16, show that five out of six Monetary Policy Board members acknowledged the need for rate cuts in the near future.
