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South Korea’s Economy Struggles to Grow Amid Political Crisis
(Bloomberg) -- South Korea’s economy continued to sputter last quarter after President Yoon Suk Yeol’s short-lived declaration of martial law battered consumer confidence just as businesses and policymakers were already fretting about the possibility of Donald Trump imposing trade tariffs.
Gross domestic product grew 0.1% in the three months through December from the previous quarter, the Bank of Korea said Thursday. That figure was weaker than economists’ forecast of a 0.2% expansion. For 2024 as a whole, the economy expanded 2%, a slower than expected pace compared with an estimate of 2.1%.
The anemic quarterly growth figure points to an economy already in a weakened state amid heightened political instability with the prospect of tariffs clouding the outlook for South Korea’s exports, a key engine of growth.
Yoon shocked the nation with his abrupt martial law declaration on Dec. 3, a move that sent the won plunging. The short-lived decree ultimately led to his impeachment and the first-ever arrest of a sitting president in South Korea.
Shoring up growth will be a key concern among policymakers keen to show that the government and central bank can continue to run the economy efficiently and respond effectively to changes in US policy under Trump even when South Korea’s president is under arrest.
“The numbers reflect weakened investment and consumer sentiment as South Korea faces uncertainties from home and abroad, especially with concerns lingering over the future direction of the country’s economy after Trump’s inauguration,” said Lee Seung-suk, a researcher at the Korea Economic Research Institute.
The report showed construction investment taking a big hit in the quarter and private consumption weakening to growth of just 0.2% from the previous three months. Exports rose 0.3% in real terms on semiconductor and other technology shipments. Still, investment in chip-making equipment and other machinery managed growth of 1.6%.
South Korea is among the world’s biggest exporters with semiconductors at the core of earnings. The growth in memory-chip exports has moderated in recent months, prompting policymakers to readjust their expectations for economic growth.
Should Trump slap tariffs on all US trade partners, South Korea would take a hit both directly through a likely reduction in US demand for its exports and indirectly via less sales of Chinese exports relying on Korean supplies.
Seoul is considering the possibility of ramping up its imports of US energy to help placate Trump, people familiar with the matter told Bloomberg last year. South Korea is also mulling the possibility of increased food imports, according to a separate Bloomberg report.
Domestically, consumer sentiment remains firmly negative with the latest reading on Wednesday showing it at 91.2 as shoppers remain cautious as the political turmoil rumbles on.
Finance Minister Choi Sang-mok is currently serving as acting president and has pledged to front-load fiscal spending to shore up consumer and business sentiment. The government has also designated a one-off holiday in late January to boost consumption. Choi has also offered to discuss the possibility of increasing fiscal support for the economy, hinting at an extra budget.
BOK Governor Rhee Chang-yong has also called for the putting together of a supplementary budget to shore up the economy as soon as possible, hinting that the government cannot simply rely on the central bank to keep cutting rates to help growth.
The BOK cut its projection for 2025 economic growth earlier this week and may do so again when it meets next month. The central bank held its key interest rate at 3% last week as it chose to monitor the impact of two cuts late last year while hinting at a further rate reduction to come in the next three months.
“There’s lingering anxiety over the country’s leadership vacuum that’s weighing on consumer sentiment,” Lee said. “The government can be cautious about an extra budget given its existing debts and fiscal deficit, but it can have an reassuring effect for the public, signaling that the government is actually doing something for the economy and that it is in control.”
(Adds analyst comments)