[Insight & Opinion] Even Without an Economic Crisis, Six Months of Pain Is Inevitable

Time Needed to Remove Impeachment Trial Uncertainty
Weaker Domestic Demand Recovery Compared to 2017
Emergency Measures Needed for Livelihoods and Small Businesses

On the 2nd, President Yoon visited Sanseong Market in his hometown Gongju and asked the market merchants, “As president, I will work hard. You trust me, right?” He promised that “policies you can feel directly on your skin will be implemented immediately.” However, the very next night, the policy that President Yoon implemented for the people to feel directly on their skin was martial law.

Since then, what changes has the shock of martial law brought to the economy over the past 10 days? First, the stock market showed little fluctuation over the past 10 days, the exchange rate rose by 2.3%, and the external debt default risk premium (CDS) increased by 6.4%, but fortunately, there was no serious shock to warrant concerns about a foreign exchange crisis.

However, the martial law incident shocked the world, causing South Korea’s national prestige to fall from the threshold of the G7 to a developing country where travel is dangerous. In addition, the diplomatic blow was dealt as the Swedish Prime Minister, known to have a strong interest in South Korea’s defense industry, canceled his planned visit to Korea. Especially due to the decline in trust in the Korean government, exports of large-scale long-term projects requiring government guarantees or high trust, such as defense, nuclear power, shipbuilding, and general construction, inevitably face difficulties for a considerable period. International credit rating agencies have indicated that while there will be no immediate adjustment to the national credit rating, there is a possibility of a rating adjustment if political instability prolongs.

Political and social instability naturally leads to reduced consumption. Restaurants are already complaining of difficulties due to cancellations of year-end gathering reservations, and the tourism industry is reported to be experiencing cancellations of reservations for the first half of next year. In particular, the shock of martial law and impeachment has wiped out the year-end peak season for self-employed businesses such as food and beverage and distribution industries, which have already been stuck in a long-term recession for more than five years without even recovering to 2019 levels.

Now, how long and how painfully will the uncertainty of the impeachment trial continue to afflict the people? Our economy experienced political turmoil for seven months starting with the candlelight rallies in October 2016, followed by the National Assembly’s impeachment approval on December 9, and the Constitutional Court’s ruling on March 10, 2017, which ended the Park Geun-hye administration, leading to a presidential election and the emergence of the Moon Jae-in administration on May 9. Based on the precedent of 2016, the impeachment trial takes at least three months, followed by two months for the presidential election, and then it takes at least six months for the newly elected president’s government to appear and completely remove uncertainty in state affairs.

However, it is important to note that this year’s economy is very different from that of 2016. In 2016, despite the shock of the candlelight revolution, domestic demand was strong and showed rapid resilience, so the economy did not suffer a major shock. But in 2024, domestic demand has shown negative growth for four consecutive quarters from Q3 2023 to Q2 this year, barely turning to positive growth in Q3, but the risk of negative growth in Q4 is increasing again, and especially the resilience of domestic demand is extremely weak, raising serious concerns about next year’s economy.

Moreover, the wounds inflicted on the economy by the shock of martial law and impeachment do not last only six months. The confusion in policy direction and weakening of policy momentum caused by the shock of martial law and frequent regime changes, as well as the decline in public trust in policies, collectively damage the total factor productivity of the entire economy, which negatively affects the potential growth rate in the long term.

Therefore, while the worst-case scenario like a foreign exchange crisis is unlikely, the National Assembly and government urgently need to prepare emergency measures to alleviate the severe hardships of people’s livelihoods expected to worsen in the first half of next year and to secure the resilience of domestic demand.

Kim Dong-won, Former Visiting Professor at Korea University