South Korea cuts 2025 growth forecast after martial law fiasco

SEOUL – South Korea cut its economic growth forecast for 2025, reflecting the fallout from impeached President Yoon Suk Yeol’s martial law debacle and risks for the trade-reliant nation from Donald Trump’s tariff plans.

The Finance Ministry now sees the economy growing 1.8 per cent in 2025 after expanding 2.1 per cent in 2024, it said in a statement on Jan 2. Those projections are down from July’s forecasts of 2.2 per cent and 2.6 per cent, respectively, and underscore the pressure from weaker private consumption and easing export momentum. 

Global uncertainties are a key risk for South Korea, as demand for memory chips may face a correction and competition among export-reliant economies is intensifying, the ministry said. It also pointed to ongoing concerns about capital outflows to the US and the country’s political situation.

“In 2025, there is a possibility that economic growth, financial markets and people’s livelihoods will be significantly affected by external and internal uncertainty that is higher than ever before,” the ministry said.

There is a growing chance that gross domestic product (GDP) may contract at the start of 2025 and the economy may end up expanding less than 1.7 per cent this year, iM Securities analyst Park Sang-hyun said in a note.

“If exports slow down, especially semiconductors, amid a deteriorating economy that is not expected to improve any time soon, downside risks to domestic GDP growth in the first quarter of 2025 are likely to increase,” he said.

South Korea is reeling from Mr Yoon’s short-lived declaration of martial law on Dec 3, which led to his impeachment and the suspension of his duties. His shock move rattled markets, hurt business sentiment and undermined the country’s diplomatic efforts. Mr Yoon remained defiantly inside his residence on Jan 2, resisting arrest for a third day and rallying his supporters.

The government will front-load its budget spending in the first half of 2025 and loosen regulations to speed it up, the Finance Ministry said, adding it will seek additional measures to boost the economy if deemed necessary after reassessing economic conditions in the first quarter.

With 2025’s fiscal spending slashed by the opposition-controlled Parliament, economists expect the government will draft a supplementary budget from as early as the first quarter.

To support consumer confidence that has weakened to a more than two-year low, the ministry said it would introduce expanded tax exemptions on spending during the first half of 2025, lower taxes on vehicle purchases by 30 per cent and prepare tax incentives for firms raising employee wages.

On Jan 2, the country’s central bank also said it would lower interest rates flexibly in 2025 amid the heightened political and economic uncertainty.

The Finance Ministry also said it would deploy contingency plans to stabilise financial markets if needed, and vowed to closely cooperate with major countries abroad to ease volatility.

South Korea’s Kospi stock market and won currency were the worst performers in Asia in 2024, with declines of 10 per cent and 13 per cent, respectively, as political turmoil took its toll on investor sentiment. BLOOMBERG, REUTERS