Korea enters 2025 on backfoot amid won woes, glum growth outlook

Containers are stacked at a port in the southeastern city of Busan during a night fall on Dec. 28. [SONG BONG-GEUN]

 
Saddled with tumbling stocks, a tanking currency and faltering economic momentum, Korea is off to a rough start to what is widely expected to be a challenging year as its risk-laden economy must now navigate the complexities of a second Donald Trump term — with no president or even prime minister at the helm, no less.
 
While political turbulence surrounding President Yoon Suk Yeol’s impeachment proceeding weighs heavily on the country’s already fragile economy, the immediate volatility masks a deeper challenge: a systemic slowdown for an export-driven nation grappling with an aging population and waning growth potential.
 

Related Article

• Crises draw finance chief away from focus as economic challenges intensify

• Martial law fallout shaves $25B off local market cap as won plummets

• Won plummets, shares dip as impeachment turmoil rattles markets

• Korea's economic growth likely to fall short of 2% next year, finance minister warns

 
The Bank of Korea (BOK) expected the country’s economy to expand by 1.9 percent in 2025, a 0.2 percentage point downgrade from its previous projection. Finance Minister and Deputy Prime Minister Choi Sang-mok, who is now also serving as the acting president, suggested that the GDP growth this year would fall below the potential growth rate of 2 percent.
 
Adding to the mounting woes, the central bank issued a bleak long-term forecast, projecting Korea’s potential growth rate to reach 0.6 percent by the late 2040s.
 
Such a somber assessment raises a pivotal question: Is the Korean economy slipping into its twilight era?
 
With the government’s policy initiatives to drive structural reforms all but stalled at the moment, the threat of entering into a prolonged low-growth period has become more palpable than ever, experts warn, calling for at least a partial resolution to the ongoing political unrest ahead of President-elect Trump’s inauguration slated for Jan. 20.

Weak won strengthens inflation woes
 
After a quagmire of a month marked by the short-lived martial law declaration on Dec. 3, the won completed its final regular trading session for 2024 above the 1,470 per dollar mark, closing at 1,472.5 won against the greenback as of 3:30 p.m. on Monday.
 
This marked the weakest closing rate since March 13, 2009, and also the weakest year-end rate since 1997, when the Asian financial crisis pushed the won-dollar exchange rate to 1,695 by the end of the year.
 
The won-dollar exchange rate soared 184.5 won from the end of 2023. The local currency, which has already been on a weakening trend due to the strengthening of the dollar propelled by Trump’s election victory, jolted downward further with Yoon’s martial law decree, and continued its free fall to a 15-year low through the end of the year following the U.S. Federal Reserve’s hawkish shift in its rate cut outlook and the impeachment of former acting president, Prime Minister Han Duck-soo.
 
As the lingering memory of the 1997 financial crisis continues to haunt the Korean economy, concerns surrounding the currency exchange rate have been growing. The won-dollar rate has been hovering above the 1,450 mark for seven consecutive sessions through Monday, the longest streak since March 2009 when the impact of the Great Recession rattled the global economy.
 

 
Authorities have asserted that the current situation does not constitute a crisis, citing the country’s robust foreign exchange reserves and its status as a net creditor nation.
 
An additional deprecation of the won, however, may further dampen Korea’s already weak domestic demand by suppressing private consumption and undermining corporate investments and hiring.
 
“It is hard to rule out the possibility of the won-dollar exchange rate reaching the 1,500 per dollar mark [under the current situation],” noted the Korea Development Institute (KDI) in its report submitted to the office of Democratic Party Rep. Lee In-young on Sunday.
 
The BOK expected that the weak currency would begin to stimulate consumer price growth in December, after inflation moderated to the 1 percent range from September, before pushing the figure up further in January.
 
Korea’s consumer price index rose 1.9 percent on year in the last month of 2024, an acceleration from the previous month’s 1.5 percent increase.
 
A 10 percent depreciation of the won’s value is estimated to bring down major conglomerates’ operating profit by 0.29 percentage points, according to data from the Korea Institute for Industrial Economics & Trade (KIET), as the cost increase is expected to offset the competitive edge a weaker won traditionally provides in boosting exports.
 
A persistently weak recovery in consumption and sluggish construction investments continued to drag down the economy as well. The KDI has consistently assessed domestic demand to be weak in its monthly economic reports for 13 consecutive months from December 2023, mainly due to slow retail sales and a prolonged downturn in the construction sector.
 




Trump 2.0 towers amid export slowdown
 
Exports, which were the key growth driver for the Korean economy last year amid a sluggish recovery in domestic demand, began to show signs of a slowdown in the pace of growth as well.
 
Korea’s real GDP grew only nominally by a mere 0.1 percentage point in the third quarter from the preceding three-month period, with net exports responsible for a 0.8 percentage point drop.
 
According to the Korea International Trade Association’s report issued on Dec. 22, the export business survey index, which gauges exporters’ business sentiment, fell to 96.1 for the first quarter of 2025, down from the previous quarter’s 103.4.
 
A reading below 100 indicates that pessimists outnumber optimists. This is the first time since the fourth quarter of 2023 that the index fell below the 100 mark.
 
Along with rising import prices and the slowing economies of major trading partners, the incoming Trump administration’s plan to raise trade barriers under its America First policy is a key factor behind the falling exporter confidence.
 
A universal tariff of 10 to 20 percent on all imports could reduce Korea’s exports to the United States by 9.3 percent to 13.1 percent, resulting in a decline in the country’s nominal value added by 7.9 trillion won to 10.6 trillion won, according to a report by the KIET published on Dec. 26.
 
However, the rise of protectionism is not the only risk the Korean economy faces, as the BOK attributed the recent slowdown in export growth to structural factors, such as harsher competition from Chinese rivals in the global semiconductor market, over temporary ones.
 
"Despite record export revenue, the growth in the sheer export volume slowed significantly in the third quarter,” said BOK Gov. Rhee Chang-yong on Nov. 28, noting, “We believe the slowdown has been driven by structural factors such as intensifying competition rather than short-term factors.”
 
Prioritizing a revitalization of the weakening growth momentum over foreign exchange volatility, the central bank lowered its benchmark interest rate by 25 basis points in November in a surprise move to 3 percent, a 1.5 percentage point gap with the Fed's rate of 4.25 to 4.5 percent.

Bank of Korea Gov. Rhee Chang-yong speaks during a press conference in central Seoul on Nov. 28 after the central bank cut its key rate to 3.25 percent. [BOK]

Rising growth concerns
 
A myriad of internal and external challenges facing Korea have been fueling concerns over the possibility of its economy entering an extended period of low inflation and low growth, similar to the experiences of Japan and the eurozone.
 
An aging population and the subsequent decline in productivity, for one, is weighing heavily on the country's potential growth rate, which has been grappling with one of the world’s lowest birthrates. Korea officially became a “super-aged” society in December, as the population aged 65 and older reached 10.2 million, making up 20 percent of the total registered population of 51.2 million.
 
“We are deeply concerned about the possibility that the Korean economy’s potential growth rate will continue to decline in the mid-to-long term due to structural issues, resulting in the start of a prolonged low-growth, low-inflation period,” said Lee Ji-ho, head of the BOK’s research department.
 
"Once we enter such a period, the economic costs required to overcome it would be immense,” said Lee, calling for structural reforms to enhance resource allocation efficiency within society.
 
“The prospect of entering secular stagnation hasn’t received that much attention in the past,” said Lee Jung-hee, an economics professor at Chung-Ang University, “But we are currently facing one of the most challenging times in Korea’s economic history.”
 
Past economic difficulties such as the 1997 currency crisis or the 2008-2009 financial crisis were largely driven by external factors, and thus did not result in an extended downturn, noted Lee.
 
But the recent signs of an economic slowdown entail the economy losing its long-term momentum, the professor suggested.
 
“We now need to devise policy measures while keeping prolonged stagnation in mind,” Lee warned, stressing that resolving the short-term political uncertainties surrounding Yoon’s impeachment should be the top priority.
 
Kim Young-ik, a professor at Sogang University’s Graduate School of Economics, pointed out that the current economic downturn is being driven by both the short-term factor of an industrial slowdown and the long-term decline of the potential growth rate.
 
“The decline of the potential growth rate stems from a shrinking labor force, slowing asset growth and stagnant productivity,” said Kim, highlighting the need to reduce the economic cost of conflict in order to improve of productivity.

BY SHIN HA-NEE [shin.hanee@joongang.co.kr]