By Jihoon Lee

SEOUL (Reuters) – South Korea’s economy barely grew in the fourth quarter of 2024, as the country’s worst political crisis in decades looms, weakening domestic demand and threatening further growth. in a year of increasing external risks under Trump’s second presidency.

In December, consumer and business sentiment weakened amid political turmoil, after President Yoon Suk Yeol was impeached and suspended from office for his brief push to impose martial law, followed by the impeachment of Punong Minister Han Duck-soo.

That effect saw gross domestic product (GDP) expand just 0.1% from a quarter earlier on a seasonally adjusted basis, the Bank of Korea’s advanced estimates showed on Thursday.

This was weaker than the 0.2% rise forecast in a Reuters survey and 0.5% projected by the central bank less than a week before Yoon’s martial law order on December 3.

Asia’s fourth-largest economy is struggling through 2024, narrowly avoiding a technical recession in the third quarter when it grew 0.1% after a 0.2% contraction in the second.

Worryingly, the BOK and economists expect the political crisis to remain a dampener on growth this year as well.

“Economic sentiment has been greatly weakened by political uncertainty, which will continue to affect the economy as a risk factor in the first quarter and throughout the year,” a Bank of Korea official said in a briefing. , who warned that the development in this quarter could also lose the central bank. November forecast of 0.5%.

Shivaan Tandon, market economist at Capital Economics, agreed: “We suspect that the weakness of activity may continue in the near term due to the ongoing political crisis and the dark outlook for the construction sector.”

The benchmark fell as much as 1.1% in morning trade after the data release, despite Wall Street’s overnight rally to a record high, as gains faded.

TRUMP FACTOR

In 2024, South Korea’s economy grew by 2.0%, after expanding by 1.4% last year, but growth is expected to slow in 2025 to 1.6% or 1.7%, below the estimated potential of around 2%, according to in BOK.

In the October-December quarter, GDP grew 1.2% annually, the slowest pace since the second quarter of 2023.

a big drag. During the quarter, consumer spending rose 0.2% and corporate investment grew 1.6%, weaker than the previous quarter’s gains of 0.5% and 6.5%, respectively, while construction investment fell 3.2%.

Exports rose 0.3%, making a modest recovery after falling 0.2% a quarter earlier, led by sales of semiconductors on strong demand for artificial intelligence. , although there are concerns that US President Donald Trump’s tariff threats against major trading partners could hit the South. Korean shipments.

“The sub-par fourth-quarter GDP result is worrying, and the country needs to find a way to strengthen the domestic economy and negotiate with the United States to limit the impact of the tariff increase,” said Danny Kim, Associate Economist at Moody’s (NYSE:) Analytics.

MORE STIMULUS IS EXPECTED

All of this means policymakers will come under pressure to increase stimulus, economists say.

“We see almost no growth in the first quarter because it is difficult to expect a recovery in domestic demand while exports are also weakening,” said Park Sang-hyun, chief economist at iM Securities.

“The Bank of Korea will definitely lower interest rates in February and probably should in April as well,” Park said, expecting the government to draft a supplementary budget as early as the second quarter.

South Korea’s central bank is expected to cut interest rates next month by 25 basis points, and twice this year to 2.25%, after an unexpected decision to hold rates this month to prevent gains. – which has weakened most Asian currencies over the past year – from falling further.

There are also growing calls from economists and opposition lawmakers for the government to come up with an additional budget to support weak domestic demand, with a smaller figure than BOK Governor Rhee Chang-yong argued in the case last week.

Finance Minister Choi Sang-mok, serving as acting president, said earlier this week that the government is ready to discuss it in parliament.