On January 23, the Bank of Korea released a report that starkly illuminates the multiple challenges confronting the South Korean economy in 2024. These difficulties stem from a combination of slowing export growth, weak domestic demand, and political instability, culminating in an anticipated economic growth rate of just 2% for the yearThis figure, while an improvement from the 2023 growth of 1.4%, falls short of the central bank's previous projection of 2.2%, highlighting a gap that warrants deeper analysis.

According to the Bank of Korea's preliminary estimates, the projected growth of 2% in real GDP for 2024 will primarily be driven by exports, which are expected to rise by 6.9% year-over-yearThis figure significantly exceeds the 3.5% growth rate seen in 2023, suggesting that certain sectors in South Korea continue to hold competitive advantages in the international market, with their products gaining recognition globallyHowever, the outlook is considerably less optimistic when assessing domestic consumptionAnticipated growth in personal spending is only 1.1%, a stark decline from last year's rate of 1.8%, indicating a noticeable drop in consumers' willingness and ability to spend.

Investment figures provide a mixed bag of results; while facility investments are projected to grow by 1.8%, possibly due to increased corporate allocations toward emerging industries and technology upgrades, building investments are expected to plummet by 2.7%. This downturn could be indicative of a sluggish real estate market and challenges facing the construction sector.

After seasonal adjustments, the economic data for the fourth quarter of 2024 further underscore the sluggish growth in South KoreaGDP is anticipated to rise by a mere 0.1% quarter-over-quarter, notably below the Bank of Korea's prediction of 0.4%. Year-over-year growth is expected to slow to 1.2%, down from 1.5% in the previous quarter, marking the slowest growth since the second quarter of 2023. During the last quarter, exports experienced a slight increase of just 0.3% compared to the previous three months, hinting at a diminishing momentum influenced by a worldwide slowdown and rising protectionist sentiments

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Conversely, import levels are predicted to dip by 0.1%, potentially reflecting dwindling domestic demand, as well as a cautious approach from businesses regarding future economic conditions.

Private consumption is expected to show a marginal increase of 0.2% from the previous quarter, yet this growth is too feeble to provide substantial support for overall economic expansionGovernment expenditure is projected to rise by 0.5%, which may contribute to stabilizing the economy to some extentMeanwhile, facility investments forecast an increase of 1.6%, maintaining a positive growth trend throughout the yearHowever, the already declining building investment is projected to decrease further by 3.2%, diminishing its potential economic impetus.

Reflecting on 2024, South Korea appeared to be on a recovery path at the year's startYet as the months progressed, export growth began to taper off, and domestic demand remained persistently weak, leading to a dwindling economic growth trajectoryParticularly since the political turmoil triggered by the enforcement of a curfew in December 2024, ongoing instability has created a storm that significantly dampens consumer confidence and business sentimentA recent survey released by the Bank of Korea on January 23 indicates that business confidence in January has hit a four-year low for the second consecutive month, underscoring enterprise concerns regarding future economic conditions.

Shivaun Tandon, an economist with Capital Economics, points out that the sluggish growth in consumer spending due to weak domestic demand remains a primary culprit behind South Korea's economic malaiseThe underwhelming consumer market performance in the fourth quarter aligns with the latest data on consumer confidence and the labor market, suggesting that the protracted political crisis may be inflicting tangible pressures on economic growthTandon also warns that as the political turmoil continues to unfold and social instability rises, consumer and business confidence may struggle to recover, alongside challenging conditions in the construction sector leading to further declines in building investments.

In response to the prevailing economic challenges, the Bank of Korea recently revised its economic growth forecast for 2025 down to between 1.6% and 1.7%, a downgrade from the previous estimate of 1.9%. The central bank believes that the future trajectory of South Korea’s economy will hinge on several critical factors

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A key element will be whether the current political uncertainties can be effectively alleviated; a stable political environment is essential for restoring consumer and business confidence and facilitating orderly economic activityFurthermore, the government's economic revival measures will play a significant role in shaping economic growth, necessitating the implementation of practical policies aimed at stimulating consumption, promoting investment, and facilitating industrial upgradesThe economic policies of the new United States government are also a crucial consideration; as a highly trade-dependent economy, changes in US policy may have profound implications for South Korea's exports and trade dynamics.

In efforts to mitigate the trade uncertainties arising from potential tariff increases by the US, the South Korean government has recently unveiled an export support plan worth approximately $250 billion designed to assist exporters in lowering risks and maintaining competitive edge in international marketsThis strategic maneuver aims to bolster the resilience of South Korean businesses amid a fluctuating global landscape.

In terms of monetary policy, the Bank of Korea announced last week during its latest monetary policy meeting that it would maintain the benchmark interest rate at 3%. This decision reflects the aim to support the weakening value of the Korean wonDuring a press conference, the Bank of Korea's Governor Leeh Chang-yong acknowledged that the decision to keep interest rates steady amid persistent economic sluggishness was fraught with challengesNevertheless, committee members expressed a consensus on the necessity to consider further rate cuts in the coming three monthsReports from Reuters suggest that the Bank of Korea may implement a 25 basis points rate cut next month, with an additional two rate cuts expected within the year, which would bring the benchmark rate down to 2.25%. Through these adjustments, the Bank of Korea aims to stimulate investment and consumer spending, injecting momentum into the economy’s growth

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