[Inside Chodong] The Painful Low-Growth Structure Hurts More Than the Tariff Punch... What We Expect from the New President

Tariff Shock Hits South Korea’s Economy...
Growth Forecasts Drop to 0% Range
Structural Reform Needed to Overcome Low Growth,
Change Must Be Driven Despite Criticism

The entire world has been thrown onto a dizzying rollercoaster by the tariff bomb dropped by U.S. President Donald Trump. South Korea could not escape unscathed. The domestic stock market and exchange rates have been experiencing wild fluctuations. Concerns over the 25% reciprocal tariffs looming before us have been compounded by worries about the U.S.-China retaliatory tariff war. Although a 90-day grace period has been granted, concerns remain as the conditions do not favor smooth negotiations.

The tariff turmoil originating from the U.S. is expected to deal a significant blow to South Korea’s export-driven economy, voices are heard from various quarters. If exports are blocked, companies will reduce production and postpone new investments. Jobs will also become precarious. This double burden raises concerns as the already struggling domestic demand worsens. In response, eight major overseas investment banks (IBs) have lowered their average forecast for South Korea’s economic growth rate this year to 1.35% as of the 13th. The number of institutions predicting ultra-low growth in the 0% range has increased. JP Morgan, after four downward revisions since its 1.7% forecast in November last year, has lowered its outlook to 0.7%.

The painful reality is that the tariff shock has only accelerated the timing of the expected ultra-low growth. South Korea has already entered the path of low growth. The country’s economic growth is hindered by structural factors such as a declining productive workforce, burdens from high housing prices and private education costs, and the limits of export-led growth. The competitiveness of traditional industries like steel and petrochemicals is no longer what it used to be, and key industries such as semiconductors and automobiles are also threatened by global competitors. Innovation in advanced industrial technologies like artificial intelligence (AI) has lagged from the starting line. Warnings have already been issued that South Korea’s potential growth rate, which was around 5% in the early 2000s, will fall to 1.8% between 2025 and 2029, and will drop to the 0% range by 2040.

Although it is late, it is clear that structural reforms must be undertaken to change the economic framework by addressing structural problems one by one. However, there are many skeptical voices here as well. Regardless of party lines, there has been a repeated pattern of retreat at critical crossroads involving regulatory reform, coordination among interest groups, and the derivation of social consensus?all of which must accompany bold attempts at change.

For example, academia has proposed various alternatives such as extending retirement age and immigration policies to address the issue of declining productivity due to a shrinking working population. However, discussions outside the ring alone cannot bring about change. The Bank of Korea’s series on structural reforms also suggests alternatives such as opening fruit imports like apples, differentiating minimum wages for foreign caregiving services, and introducing regional proportional selection systems in universities, but most of these discussions have stalled with irresponsible critiques that they lack 'realistic feasibility.' The government and political circles, which bear the responsibility to overcome the pressing low-growth problem, must not hesitate to gather opinions from all sectors of society and present more desirable alternatives. Without enduring criticism, no change can be expected.

Domestic political uncertainty remains even after the impeachment of former President Yoon Seok-yeol. The political uncertainty index stood at 2.5 (7-day moving average) as of the 13th, still high compared to 0.4?0.5 in early December last year before the emergency martial law situation. Amid this chaotic situation, the people face the task of electing a new president. The public desires a president who boldly brings difficult issues requiring social consensus to the table and begins by listening, rather than one who merely offers sweet words for immediate appeal.