Political turmoil in South Korea affects the economy! The sharp depreciation of the Korean won boosts inflation upward

According to Zhitong Finance APP, as the political situation continues to be turbulent, it has caused severe depreciation pressure on the Korean won, and consumer inflation in South Korea has unexpectedly accelerated, threatening the price stability system of this country that heavily relies on imported food and energy. The day before the inflation announcement, due to a slowdown in export growth and some political turmoil triggered by Yoon Suk-yeol's emergency decree, domestic business confidence in South Korea weakened, leading to a larger-than-expected decline in industrial output in November. These signs collectively reflect that South Korea, which has been mired in political turmoil since December, is sounding the economic alarm.

The South Korean Statistics Office reported on Tuesday that the consumer price index (CPI) in December rose 1.9% year-on-year, higher than November's 1.5% and the 1.7% generally expected by economists. A key economic data released yesterday showed that South Korea's industrial output index in November decreased by 0.7% month-on-month after seasonal adjustment, while the previous month remained unchanged. In contrast, economists generally expected a 0.4% decline in industrial output for November.

Industrial output data is crucial for the growth trend of the South Korean economy, as it relates to export trends and the overall demand level within South Korea. A larger-than-expected decline in this data may indicate that the recovery pace of the South Korean economy could be hindered.

The latest industrial output and inflation data complicate the monetary policy choices for the Bank of Korea. After consecutive interest rate cuts in October and November, the unexpected rise in inflation may limit its ability to lower the benchmark interest rate next year. Policymakers are also concerned that a series of political turmoil triggered by President Yoon Suk-yeol's brief implementation of an emergency decree, especially the ongoing impeachment of the South Korean president, has significantly reduced domestic business confidence, which may further weaken economic growth in South Korea.

Inflation Rate Accelerates Again—Continuous Depreciation of the Won Threatens South Korean Inflation

In terms of detailed data, the statistics agency of South Korea reported that in December, the prices of alcoholic beverages and tobacco fell by 0.4% year-on-year, while the prices of food and non-alcoholic beverages unexpectedly rose by 2.5%. Entertainment costs increased by 1.2%, and utility prices rose by 1.7%.

Analyst Ahn Jae-kyun from Shinhan Investment stated: "In the coming months, the impact of the weakening won on inflation may further increase, but the biggest concern at present is the continuous decline in consumer confidence. Given the signs of weakness in both production and consumption in South Korea, January may be an appropriate time for the Bank of Korea to consider cutting interest rates."

The fatal air disaster that occurred on Sunday has further exacerbated the challenges facing the country, with all but two of the 181 people on board losing their lives. Acting President Choi Sang-mok announced a week of mourning from today until January 4, which may severely affect consumer sentiment.

In addition, the South Korean political scene has been in turmoil since Yoon Suk-yeol unexpectedly announced the emergency decree, leading to a significant decline in the overall business confidence level of South Korean enterprises. Some small and medium-sized enterprises in South Korea have begun to worry that certain subsidy policies at the policy level may also be delayed due to the ongoing turmoil in the highest leadership of South Korea Bank of Korea Governor Lee Chang-yong had previously stated that South Korea's economic growth rate next year may not reach the previously predicted growth of 1.9% before this aviation disaster occurred.

Economists generally believe that the increasing weakness in private spending, the cooling rebound of South Korean exports under the pressure of Trump’s tariffs, and the continuous deterioration of consumer confidence are the core factors prompting the Bank of Korea to accelerate its easing measures next year. The monetary policy actions of global central banks, including the Federal Reserve, in the coming months will also significantly impact the monetary policy decisions of the Bank of Korea.

Regarding the expectations for the core pillar of the South Korean economy—export growth—economists expect South Korea to continue achieving export growth in December, marking the 15th consecutive month of year-on-year growth for an economy heavily reliant on exports. However, some economists indicate that, apart from the United States, the global economy is still in a weak state, compounded by a weakening base effect. Aside from a potential continued surge in semiconductor exports next year, the demand for South Korean goods in the global market may weaken under the pressure of Trump’s tariffs, leading to a significant slowdown in South Korea's export growth rate over the next year.

Trump, who is set to return to the White House in January, has previously promised to impose high tariffs on imported goods from major global trading partners, including China (the largest trading partner of South Korea). Economists generally believe that as market concerns grow over the Trump administration potentially imposing tariffs on more countries globally, South Korea's export growth momentum may significantly slow down over the next year.

"The won has fallen to its lowest level since 2009, highlighting market concerns about the impact on economic growth. However, the continued depreciation of the won may also limit the extent to which the Bank of Korea can cut interest rates to support the economy," said Kwon Hyo-seong, an economist at Bloomberg Economics.

During the COVID-19 pandemic, the South Korean government implemented large-scale stimulus measures to support economic growth, which subsequently led to a significant rise in consumer prices. Now, many global central banks, including the Bank of Korea, feel confident enough to relax their restrictive monetary policies, as their aggressive rate hikes have helped alleviate inflationary pressures.

Just two weeks after South Korean President Yoon Suk-yeol was impeached by a parliamentary vote, acting President Han Duck-soo was also impeached by a parliamentary vote, an unprecedented event in South Korean politics, prompting protests from the public demanding that the National Assembly quickly select a new leadership to restore normal government order.

Last Wednesday, a total of 192 members of the National Assembly voted in favor of the impeachment, exceeding the 151 votes required to successfully impeach acting President Han Duck-soo. Following the imposition of martial law by President Yoon Suk-yeol, with acting President Han Duck-soo also impeached by the National Assembly, Deputy Prime Minister and Minister of Strategy and Finance Choi Sang-mok has assumed the role of acting president. The political situation in South Korea is expected to face more chaos and uncertainty, and the South Korean economy will also face severe challenges until the political turmoil subsides