The political turmoil triggered by South Korean President Yoon Suk-yeol's declaration of "martial law" is having profound effects on the country's economy. This Thursday, the South Korean government released its latest economic forecast, dramatically lowering the GDP growth expectation for 2025 from the previous 2.6% to 1.8%, highlighting the pressures from weakened private consumption and slowing exports.
Reduction in Economic Growth Expectations
In a statement, the South Korean Ministry of Finance projected the economy to further slow down to 1.8% growth in 2025 following 2.1% in 2024. This figure is significantly lower than the forecast in July 2024, reflecting the rapidly deteriorating economic environment. Key factors include adjustments in global memory chip demand, intensified international export competition, and domestic political instability in Korea.
The South Korean government noted that the outflow of capital to the United States poses an increasing risk, while the country’s export-dependent economic model faces greater challenges in the current international environment. Additionally, the constitutional crisis stemming from Yoon Suk-yeol's martial law declaration has further eroded investor confidence, with the uncertainty in the political situation likely to increase.
Economic Consequences of the Constitutional Crisis
Yoon Suk-yeol's sudden imposition of martial law in December 2024 plunged the South Korean political scene into chaos. He was subsequently impeached and suspended by the Parliament and is currently awaiting a ruling by the Constitutional Court. This move has led South Korea into its most severe constitutional crisis in decades, attracting international attention and impacting the domestic economy. Investor sentiment has been dampened, increasing the risk of capital outflow.
Policy Direction of the Bank of Korea
The latest government forecast also falls below the previous expectations of the Bank of Korea. The central bank had predicted a growth of 1.9% for 2025 in November 2024. Bank of Korea Governor Lee Chang-yong indicated that the central bank might further lower its growth forecast at its meeting in February 2025. To mitigate the impact of political unrest on the economy, the Bank of Korea and the government have pledged to provide unlimited liquidity.
Some economists believe that the Bank of Korea may cut rates again at its January meeting, marking the third rate cut since October 2024. The ongoing monetary easing policy aims to stabilize the economy, but with the dual pressures of global uncertainty and domestic political crisis, the economic outlook remains challenging.
Future Outlook
The South Korean economy is at a critical juncture, facing internal and external challenges. Intensified competition in international markets, reduced demand for memory chips, and political turmoil make economic recovery more difficult. Going forward, resolving the political crisis and rebuilding investor confidence will be the top priorities for the South Korean government and central bank.
