South Korea has downgraded its economic growth forecast for 2025, citing the impact of political instability and global trade challenges. The Finance Ministry now expects the economy to grow by 1.8%, down from an earlier projection of 2.2%. This follows a slowdown in 2024, where growth was recorded at 2.1%, compared to the 2.6% initially forecasted.
The ministry’s revised outlook reflects a weaker-than-expected domestic consumption and a slowdown in exports, particularly in the memory chip sector. The government warned of intensified competition among export-reliant nations and ongoing global uncertainties, which pose significant risks to South Korea’s economy. In addition, the potential for capital outflows to the US and the country’s unstable political climate are further concerns.
A key factor contributing to the country’s economic turbulence is the fallout from President Yoon Suk Yeol’s controversial decision to declare martial law on December 3, 2024. The move, which led to his impeachment and suspension, has shaken markets, dampened business sentiment, and strained diplomatic efforts. The Constitutional Court is set to determine whether Yoon will be permanently removed from office, adding another layer of uncertainty.
The updated government growth forecast for 2025 is 0.1 percentage points lower than the Bank of Korea’s (BOK) prediction made in November. BOK Governor Rhee Chang-yong indicated last month that the central bank may lower its own forecast further in February, following a trend of monetary easing. Economists speculate that the BOK could cut its benchmark interest rate for the third time in January as part of efforts to mitigate the economic strain.
Rhee emphasized the need for a flexible monetary policy approach, acknowledging that stabilizing the economy solely through rate cuts may not be sufficient given the heightened political and economic volatility.
iM Securities analyst Park Sang-hyun also warned of potential contraction in GDP at the start of 2025, forecasting that the country’s economy could grow less than 1.7% if export demand, particularly in semiconductors, continues to decline. “If exports slow down amid ongoing economic challenges, the risks to domestic GDP growth will likely rise, especially in the first quarter of 2025,” he stated.
The South Korean government and the central bank have both pledged to offer unlimited liquidity if necessary to cushion the economic blow from the ongoing political crisis. However, the broader economic outlook remains clouded by both internal and external pressures.
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