The South Korean government significantly lowers GDP expectations as a turbulent political landscape drags down the economy

According to the Zhitong Finance APP, the South Korean government has significantly lowered its economic growth forecast for this year, reflecting the negative economic impact caused by a series of political turmoil resulting from the failed emergency martial law order initiated by the impeached President Yoon Suk-yeol, as well as the shadow cast over the export-dependent South Korean economy due to Donald Trump's tariff plans. Recent data released by the South Korean government indicates that the ongoing political turmoil has affected the economy, and if the political instability continues, the South Korean economy may continue to decline.

In a latest statement on Thursday, the South Korean Ministry of Finance stated that it expects GDP growth of 2.1% in 2024, while predicting that the South Korean economy will grow by 1.8% in 2025. This latest forecast is significantly lower than the Ministry of Finance's prediction in July, which had estimated a 2.6% growth in South Korea's GDP for 2024 and a 2.2% growth for 2025, highlighting the risks posed to corporate and consumer confidence in South Korea due to the continuous impeachment of the country's top leaders and ongoing political turmoil, as well as the pressures of weak private consumption and slowing export momentum facing the South Korean economy.

The South Korean Ministry of Finance stated that global economic and demand uncertainties are among the key risks facing the South Korean economy, and the currently extremely strong demand for storage chips may face a risk of adjustment, with intensified competition among export-dependent economies spurred by the U.S. tariff policy. The government department also noted that significant capital outflows to the United States and the uncertainty of the political situation in South Korea may continue to expand.

Cooling Economic Growth - South Korea Lowers GDP Forecasts for 2024 and 2025

The South Korean public was shocked by President Yoon Suk-yeol's brief emergency martial law order announced on December 3, which led to his impeachment and suspension from the presidency. The Constitutional Court will decide his fate, and until the court makes a final ruling, Yoon Suk-yeol remains the President of South Korea, but is suspended from presidential duties. His unexpected move has plunged South Korea into the most severe constitutional crisis in decades and has undermined investor sentiment.

Due to the slowdown in export growth and the political turmoil triggered by Yoon Suk-yeol's martial law order, business confidence in South Korea has 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 Ministry of Finance's outlook for 2025 is 0.1 percentage points lower than the forecast made by the Bank of Korea in November. Bank of Korea Governor Lee Chang-yong told reporters last month that the central bank may further lower its economic growth forecast for 2025 at the monetary policy meeting in February.

The Bank of Korea and some government departments have committed to providing almost unlimited liquidity if necessary to limit the impact of the political crisis on South Korean financial assets and the overall South Korean economy. Some economists speculate that the Bank of Korea may lower the benchmark interest rate in January, marking the third consecutive rate cut since the policy shift last October The Governor of the Bank of Korea, Lee Chang-yong, stated on Thursday that continued interest rate cuts could raise concerns about sustained depreciation at the exchange rate level. He vowed to closely monitor various risk factors to determine the specific pace of the Bank of Korea's monetary policy.

Analyst Park Sang-hyun from iM Securities noted in a report that South Korea's GDP growth rate may significantly shrink by early 2025, with the possibility of the economy growing by less than 1.7% this year increasing. He emphasized, "If exports slow significantly, especially semiconductor exports, and the economic situation continues to deteriorate with no expected improvement in the short term, the downside risk for domestic GDP growth in the first quarter of 2025 may increase significantly."

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

Former President 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 widely believe that as market concerns grow about the Trump administration potentially imposing tariffs on more countries globally, South Korea's export growth momentum may significantly slow in the coming year.

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

Since President Yoon Suk-yeol unexpectedly announced a state of emergency, South Korean politics has been in turmoil, significantly lowering the overall business confidence level among South Korean companies, and some small and medium-sized enterprises are beginning to worry that certain subsidy policies may be delayed due to the ongoing instability in the highest leadership of South Korea.

Last Wednesday, a total of 192 members of the National Assembly voted in favor of impeachment, exceeding the 151 votes required to successfully impeach acting President Han Duck-soo. Following the state of emergency initiated by President Yoon Suk-yeol, with acting President Han Duck-soo also impeached by the National Assembly, Vice 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 face severe challenges until the political turmoil subsides