South Korea’s Economy Stagnates Amid Political Crisis
Growth Slows to a Crawl
South Korea’s economy has ground to a near-halt, with growth stagnating in the fourth quarter of 2024. The country’s worst political crisis in decades has taken a toll on already weakened domestic demand, threatening to further sap growth in a year of rising external risks.
Political Uncertainty Weighs on Sentiment
In December, consumer and business sentiment plummeted amid political chaos, following the impeachment and suspension of President Yoon Suk Yeol and Prime Minister Han Duck-soo. This Perfect Storm of uncertainty has seen gross domestic product (GDP) expand a mere 0.1% from the previous quarter, a far cry from the 0.2% forecast and 0.5% projected by the central bank.
A Year of Struggle
Asia’s fourth-largest economy has struggled to gain traction in 2024, narrowly avoiding a technical recession in the third quarter. The Bank of Korea and economists warn that the political crisis will continue to dampen growth this year, with economic sentiment expected to remain weak.
Trump Factor Looms Large
The South Korean economy grew 2.0% in 2024, but growth is projected to slow in 2025 to 1.6% or 1.7%, below the estimated potential of around 2%. The ongoing political crisis and bleak outlook for the construction sector are expected to persist, while U.S. President Donald Trump’s tariff threats against major trading partners could hit South Korean shipments.
Consumption and Investment Slump
In the October-December quarter, GDP grew 1.2% on an annual basis, the slowest pace since the second quarter of 2023. Consumption was a major drag, with consumer spending rising a meager 0.2% and corporate investment growing 1.6%, weaker than the previous quarter’s gains.
Exports Make a Modest Recovery
Exports rose 0.3%, making a modest recovery after their fall of 0.2% a quarter earlier, led by sales of semiconductors on robust demand for artificial intelligence. However, worries persist that U.S. President Donald Trump’s tariff threats could hit South Korean shipments.
Stimulus Expected to Boost Economy
Policymakers will be under pressure to step up stimulus, economists say. With almost no growth expected in the first quarter, the Bank of Korea is likely to lower interest rates in February and April, while the government may draft an extra budget as early as the second quarter to support frail domestic demand.
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