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Bank of America (BofA) has revised its forecast for South Korea’s gross domestic product (GDP) growth for the year 2025, citing a combination of international and domestic challenges that could dampen economic prospects. The financial institution has trimmed its GDP growth prediction to 1.5% from the previous 1.8%.
This decision comes in the wake of recent global economic events, including the initiation of new trade tariffs by the Trump administration, a pause in rate cuts by the Federal Reserve during its January meeting, and the emergence of a competitive generative AI from China named DeepSeek. BofA’s analysis indicates that these factors collectively present downside risks to South Korea’s economic growth.
The U.S. and South Korea have maintained a Free Trade Agreement (FTA) since 2012, which has effectively reduced bilateral tariffs to nearly zero. Despite slight amendments to the FTA during Trump’s first term, aimed at addressing imbalances in the auto sector, the U.S. trade deficit with Korea has expanded significantly.
With the U.S. extending tariffs beyond China to include Canada and Mexico, and Korean steel facing a universal 25% tariff, BofA suggests there is an increased likelihood of tariff risks to Korean goods and potential renegotiation of the FTA.
On the monetary policy front, the Federal Reserve’s decision to hold rates in January, coupled with a strong labor market and persistent inflation, has led BofA’s U.S. economists to anticipate no further rate cuts. This could cap the lower boundary of the terminal rate for the Bank of Korea (BoK), with BofA expecting a low probability of BoK terminal rate cuts going beyond 2.25%.
Additionally, the rise of China’s DeepSeek AI poses new uncertainties for Korea’s technology exports. Korean high bandwidth memory (HBM) exports, closely linked to AI demand, could be impacted by the lower development costs of AI models, potentially reducing the need for high-end chips.
While there have been no significant order reductions from major U.S. tech companies to date, the volatility of semiconductor export growth momentum remains a concern for domestic investment in South Korea’s facilities.
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