South Korea’s Economy Struggles to Gain Traction Amid Political Uncertainty
The South Korean economy is facing significant headwinds, with growth stagnating in the last quarter due to political turmoil and its impact on consumer spending. According to a recent survey of economists, the country’s economy is expected to have expanded by a mere 0.2% in the fourth quarter, a slight improvement from the 0.1% growth seen in the previous quarter.
Political Chaos Weighs on Consumer Sentiment
The brief attempt by President Yoon Suk Yeol to impose martial law on December 3 has created an atmosphere of uncertainty, leading to a decline in economic sentiment and sluggish domestic demand. This has overshadowed the recovery in exports, which rose 6.6% in December compared to the same period last year. Semiconductor exports, in particular, saw a significant increase of 31.5% during the same period.
Central Bank Likely to Cut Interest Rates
The Bank of Korea’s unexpected decision to hold interest rates steady earlier this month was seen as a move to prevent the Korean won from weakening further. However, with the currency having stabilized somewhat since then, economists expect the central bank to cut interest rates by 25 basis points in February. In fact, all 25 economists surveyed expect a rate cut, with median forecasts indicating a total cut of 75 basis points by the end of the third quarter.
Currency Stability Takes Center Stage
The Bank of Korea’s decision to prioritize currency stability over domestic demand concerns has been seen as a short-term measure to boost investor confidence. However, with the economy expected to grow at a lackluster pace, the central bank is likely to revisit its monetary policy stance in the coming months. As Krystal Tan, an economist at ANZ, notes, “High-frequency indicators point to domestic demand weakness, particularly in December, as political events hurt consumer and business confidence.”
Rate Cut Expectations Remain Intact
Despite the recent stability in the currency, economists believe that the Bank of Korea will still deliver a rate cut in February. As Min Joo Kang, senior economist at ING, notes, “Even if the USD/KRW climbs back, as long as the current political situation does not worsen and it is driven more by global dollar strength, the BOK is likely to deliver a rate cut in February.” The central bank’s decision to lower its 2025 economic growth projection from 1.9% to a range of 1.6% to 1.7% has also reinforced the rate cut view.
Growth Prospects Remain Challenging
With the economy expected to grow at a slow pace, the Bank of Korea will need to keep a close eye on political developments, growth, inflation, and the won to gauge when to cut rates. As the country navigates these challenging times, one thing is clear – the road to economic recovery will be long and arduous.
Leave a Reply