Korean Economy Faces Risk of Prolonged Slow Growth Amid Political Uncertainty | Be Korea-savvy

Korean Economy Faces Risk of Prolonged Slow Growth Amid Political Uncertainty


High inflation and an economic downturn have strained consumers’ finances, and political instability following the martial law incident has further dampened consumer sentiment significantly. (Yonhap)

High inflation and an economic downturn have strained consumers’ finances, and political instability following the martial law incident has further dampened consumer sentiment significantly. (Yonhap)

SEOUL, Jan. 20 (Korea Bizwire) — South Korea’s economic growth could stagnate at around 1% if political instability continues, warns a report by the Hyundai Research Institute.

Released on Sunday, the report highlights both domestic and international risks weighing on Asia’s fourth-largest economy, which is already grappling with weakening market confidence.

Political and Economic Pressures

Domestically, South Korea’s economy is experiencing a downturn exacerbated by political turmoil, including impeachment proceedings against President Yoon Suk-yeol.

Business and consumer confidence have deteriorated, while external pressures such as the strengthened U.S. dollar have pushed the won/dollar exchange rate to a high of 1,470 won.

Forecasts from major investment banks have downgraded South Korea’s economic growth prospects, with average growth projections falling from 2.1% in November 2024 to 1.8% in January 2025. Some estimates suggest growth could dip closer to 1%.

“If political disruptions persist, South Korea risks mismanaging domestic and external challenges, leading to a long-term economic slowdown,” the report states. It calls for swift political stabilization and proactive measures to manage economic risks and bolster investor confidence.

Due to political instability, South Korea's economic growth for this year is forecasted to hover in the high 1% range. Faced with significant domestic and international challenges, the Korean economy is experiencing a decline in consumer spending, further highlighting uncertainties in domestic demand. Some investment banks have projected growth as low as the low 1% range. The photo shows citizens walking past a shop selling Korean goods to tourists in Myeong-dong, Seoul, on January 7. (Yonhap)

Due to political instability, South Korea’s economic growth for this year is forecasted to hover in the high 1% range. Faced with significant domestic and international challenges, the Korean economy is experiencing a decline in consumer spending, further highlighting uncertainties in domestic demand. Some investment banks have projected growth as low as the low 1% range. The photo shows citizens walking past a shop selling Korean goods to tourists in Myeong-dong, Seoul, on January 7. (Yonhap)

Global Challenges Under Trump’s Second Term

Internationally, the re-election of Donald Trump as U.S. president adds new uncertainty. Hyundai Research Institute predicts Trump’s second administration will intensify U.S.-China competition, disrupt global trade structures, and heighten protectionism.

Expected changes in U.S. trade policy, including potential tariff hikes, could trigger retaliatory measures and negatively impact the global economy.

The report also warns that Trump’s economic policies may use trade as leverage in other areas, such as defense and foreign relations. This “America First” approach could widen economic disparities between the U.S. and other countries, as the U.S. maintains its exceptional growth momentum despite a global slowdown.

Retail sales in South Korea saw their largest decline since the 2003 'credit card crisis,' which froze consumer spending. According to data from Statistics Korea's National Statistics Portal (KOSIS) on January 12, the retail sales index from January to November of last year dropped by 2.1% compared to the same period the previous year. This marks the steepest decline in 21 years since the 3.1% drop in 2003. This consumption slump has affected all product categories without exception, including durable goods like automobiles and home appliances, semi-durable goods like clothing, and non-durable goods such as food and beverages. The photo shows Myeongdong Street in Seoul on the same day. (Yonhap)

Retail sales in South Korea saw their largest decline since the 2003 ‘credit card crisis,’ which froze consumer spending. According to data from Statistics Korea’s National Statistics Portal (KOSIS) on January 12, the retail sales index from January to November of last year dropped by 2.1% compared to the same period the previous year. This marks the steepest decline in 21 years since the 3.1% drop in 2003. This consumption slump has affected all product categories without exception, including durable goods like automobiles and home appliances, semi-durable goods like clothing, and non-durable goods such as food and beverages. The photo shows Myeongdong Street in Seoul on the same day. (Yonhap)

Other Trends to Watch

Domestically, the institute anticipates prolonged consumer spending slumps and a shift in South Korea’s real estate market from lease-based to monthly rental transactions.

Increased military tensions on the Korean Peninsula may drive an arms race, though the rise of Korean cultural exports could positively influence the broader economy.

Globally, artificial intelligence is emerging as a new battleground for dominance, while rate cuts by central banks may lead to rising debt levels.

A Call for Strategic Adaptation

The report emphasizes the need for South Korea to adopt a balanced strategy of multilateral and bilateral diplomacy to navigate the increasingly transactional international order.

“Korea must maximize its national interest by recalibrating its economic and security strategies to adapt to the changing global landscape,” it concludes.

As South Korea contends with mounting internal and external challenges, swift action will be crucial to avoid a protracted economic slowdown and ensure resilience in an uncertain global environment.

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

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