[Yoon Seok-yeol Impeachment] Political Uncertainty Removed... But Multiple Adverse Factors Lead to 'Zero Visibility for Korean Economy'

"Focus Needed on Crisis Management"

On the 4th, the uncertainty that had been weighing down the Korean economy was largely lifted following the Constitutional Court's impeachment ruling. However, escalating trade tensions and a domestic economy that has cooled off significantly are expected to continue hampering the economy throughout the two-month presidential election period. The trade risks posed by the recently announced U.S. country-specific reciprocal tariffs are anticipated to have an even greater impact on the overall Korean economy. The government, faced with a tougher tariff policy than initially expected, urgently needs to prepare emergency measures to minimize the shock. There are calls to focus all policy efforts on establishing crisis management measures centered around an economic control tower to minimize the governance vacuum during the two months leading up to the presidential election.

Tension is mounting on the 3rd at the Grand Bench of the Constitutional Court in Jongno-gu, Seoul, one day before the Constitutional Court's ruling on the impeachment trial of President Yoon Seok-yeol. April 3, 2025 Photo by Joint Press Corps

Short-term Key Tasks for Responding to High Tariffs: Policies Needed to Turn Crisis into Opportunity

Kim Jeong-sik, Professor Emeritus of Economics at Yonsei University, said in a phone interview with Asia Economy on the same day, "Now is the time to move beyond defensive economic policies and actively shift to policies that turn the crisis into an opportunity." He emphasized, "How to respond to the U.S.'s high tariffs is a short-term key task." The recent reciprocal tariffs and previously announced automobile tariffs have led to overall raw material price increases and reduced corporate profits, increasing pressures for economic recession and downward pressure on the national credit rating. The U.S. is applying comprehensive pressure to increase its bargaining power by leveraging designations of Korea as a sensitive country, resolving non-tariff barriers, and raising defense cost-sharing. Some analyses suggest that the automobile tariffs alone could reduce Korea's gross domestic product (GDP) by as much as -0.12%. While some adjustments may be possible through individual negotiations, delays in negotiations due to the absence of national leadership during the presidential election period and the early months of the new government?lasting two to three months?are expected to be unavoidable.

Addressing the prolonged domestic demand slump that has continued through the four-month impeachment crisis is also a critical issue that the new government must prioritize after its inauguration. Signs of economic downturn are clearly detected in indicators such as production, consumption, and investment. Production in accommodation and food service sectors, which reflect the livelihood economy, decreased by 3% in February compared to the previous month, marking the largest drop in three years since February 2022 (-8.1%) during the COVID-19 pandemic. The construction sector, a cause of domestic demand weakness, also shows a downward trend with construction orders?a leading indicator?falling 6.9% year-on-year, and construction performance plunging 21% year-on-year. The consumer sentiment index in March recorded 93.4, down 1.8 points from the previous month. Lee Hye-young, head of the Economic Sentiment Survey Team at the Bank of Korea, explained, "The decline was due to concerns over weakening growth caused by sluggish domestic demand and slowing export growth."

Concerns have been raised that important policy decisions may be delayed during the two to three months of the presidential election period and the early phase of the next government, potentially slowing the pace of economic recovery. Citibank predicted, "If the political instability's impact on economic sentiment prolongs, the domestic demand recovery will weaken, and increased volatility in the won-dollar exchange rate may delay the Bank of Korea's timing for interest rate cuts." As the regime change period begins, companies are postponing investment decisions, and consumers are reluctant to open their wallets, creating a vicious cycle where the cautious economic agents further slow the pace of economic recovery.

Growth Forecast in the 0% Range with Priority on Expansionary Policy
Pressure from Recession and National Credit Downgrade; Addressing Domestic Demand Slump Also a Key Issue

There have even been forecasts that the Korean economy will grow only in the 0% range this year due to the loss of national power caused by the impeachment crisis. British research firm Capital Economics (CE) projected in a report published on the 26th of last month that "Korea's economic growth rate will be only 0.9% this year," reflecting weak government spending and a slump in the real estate sector. Around the same time, S&P, one of the world's top three credit rating agencies, lowered Korea's growth forecast for this year from 2.0% to 1.2%, a 0.8 percentage point cut. Subsequently, global investment banks such as Barclays (1.4%), HSBC (1.4%), and Goldman Sachs (1.5%) also successively downgraded their outlooks for the Korean economy.

The key going forward lies in how quickly the new government can resolve political divisions and propose policy shifts to manage the economic crisis. Kang Sung-jin, Professor of Economics at Korea University, said, "Simply entering the presidential election mode after the ruling can have some effect in stimulating the economy," adding, "Ultimately, the key will be instilling expectations among economic agents that the economy will revive through swift policy implementation, such as supplementary budget formulation." Kim Jeong-sik, Professor of Economics at Yonsei University, stated, "To revive the domestic economy, which has contracted due to political turmoil and worsening external conditions, it is necessary to shift to an expansionary stance in both fiscal and monetary policy."