SEOUL: South Korea’s Economic Struggles Amid Political Turmoil
South Korea’s economy has faced significant challenges in the fourth quarter of 2024, with growth barely registering amid a political crisis that has shaken the nation to its core. The impeachment of President Yoon Suk Yeol, following his controversial attempt to impose martial law, has led to a decline in consumer and business confidence, exacerbating already weakened domestic demand. This political instability comes at a time when external risks are also on the rise, particularly with the prospect of a second Trump presidency in the United States, which could further complicate South Korea’s economic landscape.
The Bank of Korea’s advanced estimates revealed that the country’s gross domestic product (GDP) expanded by a mere 0.1 percent on a seasonally adjusted basis from the previous quarter. This figure fell short of the 0.2 percent growth anticipated in a Reuters survey and the 0.5 percent projection made by the central bank just days before the political upheaval began. The fourth quarter’s performance is particularly concerning given that South Korea narrowly avoided a technical recession in the third quarter, managing only a 0.1 percent growth after a 0.2 percent contraction in the second quarter.
The ongoing political crisis has cast a long shadow over economic sentiment, with experts warning that the effects will likely linger into 2025. A Bank of Korea official noted that the uncertainty surrounding the political situation would continue to weigh on economic performance, potentially causing growth in the first quarter to fall short of the central bank’s earlier forecast of 0.5 percent. Markets economist Shivaan Tandon from Capital Economics echoed this sentiment, suggesting that the current weakness in economic activity could persist due to the political turmoil and a bleak outlook for the construction sector.
The political chaos has not only impacted growth forecasts but has also led to immediate market reactions. Following the release of the disappointing GDP data, South Korea’s benchmark KOSPI index fell by as much as 1.1 percent in morning trading, despite a rally on Wall Street. Additionally, the South Korean won weakened against other currencies, reflecting investor concerns about the country’s economic stability.
In terms of overall economic performance, South Korea’s economy grew by 2.0 percent in 2024, a modest increase from the 1.4 percent growth seen in the previous year. However, projections for 2025 indicate a slowdown, with growth expected to drop to between 1.6 percent and 1.7 percent, falling below the estimated potential of around 2 percent. The fourth quarter saw GDP grow by only 1.2 percent on an annual basis, marking the slowest pace since the second quarter of 2023.
A significant factor contributing to this sluggish growth has been weak consumer spending. In the fourth quarter, consumer expenditure rose by just 0.2 percent, while corporate investment increased by 1.6 percent—both figures lagging behind the previous quarter’s gains. Construction investment, a critical component of the economy, fell by 3.2 percent, further highlighting the challenges faced by the sector.
Exports provided a slight glimmer of hope, rising by 0.3 percent in the fourth quarter, primarily driven by robust demand for semiconductors linked to artificial intelligence. However, concerns loom over potential tariff threats from U.S. President Donald Trump, which could adversely affect South Korean exports and overall economic performance. Danny Kim, an Associate Economist at Moody’s Analytics, emphasized the need for South Korea to bolster its domestic economy and engage in negotiations with the United States to mitigate the impact of any tariff increases.
In light of these challenges, there is mounting pressure on policymakers to implement additional stimulus measures. Economists predict that the Bank of Korea will likely lower interest rates in February, with further cuts anticipated later in the year. Park Sang-hyun, chief economist at iM Securities, noted that the first quarter is expected to see almost no growth, making it difficult to foresee a recovery in domestic demand while exports remain weak.
The Bank of Korea is expected to reduce interest rates by 25 basis points next month, with two more cuts projected throughout the year, bringing rates down to 2.25 percent. This follows an unexpected decision to hold rates steady in December, aimed at preventing the won from depreciating further, as it was the worst-performing currency in Asia last year.
Calls for a supplementary budget to support the faltering domestic economy are growing louder, with BOK Governor Rhee Chang-yong advocating for such measures. Finance Minister Choi Sang-mok, currently serving as acting president, has indicated the government’s willingness to discuss this proposal with parliament, signaling a potential shift in fiscal policy to address the pressing economic challenges facing South Korea.
