Economic Strain Mounts in South Korea Amid Martial Law Incident and Political Chaos | Be Korea-savvy

Economic Strain Mounts in South Korea Amid Martial Law Incident and Political Chaos


Due to political instability, South Korea's economic growth for this year is projected to remain in the high 1% range. Facing significant domestic and international challenges, the Korean economy is seeing tightened consumer spending, heightening uncertainty in domestic growth. Some investment banks are forecasting growth in the low 1% range. In reality, since the martial law incident, nationwide credit card spending has decreased compared to the same period last year, reflecting a contraction in private consumption. Additionally, if U.S. President-elect Donald Trump significantly raises tariffs as promised after taking office, South Korea's exports are expected to suffer direct impacts. The photo shows shops in the heart of Myeong-dong, Jung-gu, Seoul, closed for business on January 7, 2025 (Yonhap)

Due to political instability, South Korea’s economic growth for this year is projected to remain in the high 1% range. Facing significant domestic and international challenges, the Korean economy is seeing tightened consumer spending, heightening uncertainty in domestic growth. Some investment banks are forecasting growth in the low 1% range.
In reality, since the martial law incident, nationwide credit card spending has decreased compared to the same period last year, reflecting a contraction in private consumption. Additionally, if U.S. President-elect Donald Trump significantly raises tariffs as promised after taking office, South Korea’s exports are expected to suffer direct impacts.
The photo shows shops in the heart of Myeong-dong, Jung-gu, Seoul, closed for business on January 7, 2025 (Yonhap)

SEOUL, Jan. 17 (Korea Bizwire) — South Korea’s economy is grappling with deeper-than-expected shocks stemming from President’s declaration of martial law on December 3, 2024, according to a new analysis from the Bank of Korea (BOK).

The political instability has forced the central bank to reconsider its economic growth projections for both 2024 and 2025, raising the likelihood of an imminent interest rate cut to stimulate the economy.

Bank of Korea Governor Rhee Chang-yong acknowledged that the economic fallout from the martial law has been more severe than initially anticipated. “Post-martial law data indicates significant declines in consumer spending and construction activities,”

Rhee stated during a press briefing following the Monetary Policy Board meeting on January 16, 2025. He warned that South Korea’s fourth-quarter GDP growth for 2024 might fall an additional 0.2 percentage points below previous estimates.

Initially, the BOK had projected that the economic impact would lower the 2024 fourth-quarter growth rate from 0.5% to 0.4% and the annual growth rate from 2.2% to 2.1%.

However, Rhee indicated the damage may be even more substantial. With lackluster economic performance in the second (-0.2%) and third (0.1%) quarters of 2024, the economy’s ability to sustain a 2% growth rate is now in question.

The BOK also expressed concern over ongoing political uncertainty, including impeachment proceedings, further dampening consumer confidence and economic momentum as 2025 unfolds.

Bank of Korea Governor Rhee Chang-yong speaks during a press briefing on the Monetary Policy Board’s interest rate decision at the Bank of Korea headquarters in Jung-gu, Seoul, on January 16, 2025 (Yonhap)

Bank of Korea Governor Rhee Chang-yong speaks during a press briefing on the Monetary Policy Board’s interest rate decision at the Bank of Korea headquarters in Jung-gu, Seoul, on January 16, 2025 (Yonhap)

 

The Monetary Policy Board noted that unexpected political risks have heightened downside risks to growth and increased currency volatility, making it likely that 2025 growth will fall short of the previously forecasted 1.9%.

Despite these economic headwinds, the BOK held its key interest rate steady in January, citing concerns over the Korean won’s volatility against the U.S. dollar.

Rhee defended the decision, emphasizing that while economic conditions warrant a rate cut, external imbalances and currency instability prevented immediate action. However, he hinted that a rate reduction could occur as soon as February 2025 if currency markets stabilize.

All six members of the Monetary Policy Board, excluding the governor, reportedly agreed on the possibility of a rate cut within the next three months.

Market analysts now widely expect a policy rate cut in February. Park Jung-woo, an economist at Nomura Securities, predicted the BOK would lower rates three times in 2025, potentially bringing the benchmark rate down to 2.25% by the third quarter.

Economic experts, including Cho Young-moo of LG Economic Research Institute, foresee a potential 0.50 percentage point rate reduction in the first half of 2025, contingent on global economic trends and domestic political developments.

The U.S. Federal Reserve’s cautious approach to rate cuts could complicate the BOK’s monetary policy, especially as widening interest rate differentials may pressure the Korean won and spur capital outflows.

In December 2024, the Federal Open Market Committee signaled only two potential rate cuts for 2025, a shift from its earlier projection of four. Major global investment banks, including Bank of America and Deutsche Bank, have even speculated that the Fed may forgo rate cuts entirely this year.

This divergence in monetary policy could place South Korea in a difficult position. Aggressive rate cuts by the BOK could exacerbate currency depreciation and trigger foreign capital flight, while restraint might hinder economic recovery.

Joo Won, chief economist at Hyundai Research Institute, emphasized the dilemma, noting that both the Fed and BOK may limit themselves to at most two rate cuts in 2025.

As South Korea navigates the intertwined challenges of political instability and economic uncertainty, all eyes are on the Bank of Korea’s next moves to stabilize growth and maintain financial stability.

M. H. Lee (mhlee@koreabizwire.com)

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