Impeachment Situation and Trumpism Overlap to Create 'Zero Visibility'... 1% Growth Expected This Year

As the impeachment situation prolongs, the Korean economy has entered a state of 'zero visibility.' Externally, the inauguration of Donald Trump's second U.S. administration, which emphasizes protectionism, is increasing uncertainty. The rapidly shrinking domestic demand and the soaring won-dollar exchange rate are also weighing down the Korean economy. It is widely expected that Korea's economic growth rate will remain in the 1% range this year.

Shaky Exports

Above all, 'exports,' the backbone of the Korean economy, are shaking. The 'base effect' of poor exports in 2023 has ended. With the Trump administration emphasizing protectionism, concerns about 'peak out' (reaching a peak and then declining) are growing.

The Bank of Korea predicts that the growth rate of goods exports will plummet from 6.3% last year to 1.5% this year. This is interpreted as a result of considering factors such as the adjustment of the semiconductor upcycle, intensified competition, and increased uncertainty in the trade environment. While some items like high-performance semiconductors and shipbuilding will maintain a good flow, there is talk of a slowdown in exports of major items like general-purpose semiconductors and petrochemicals.

Companies view this year's trade environment as unprecedentedly uncertain. According to the 'Export Business Survey Index (EBSI) for the First Quarter of 2025 (January-March)' report published by the Korea International Trade Association, the EBSI for the first quarter of next year was surveyed at 96.1. It fell below the baseline of 100 for the first time in four quarters. A figure below 100 means that exports are expected to worsen compared to the previous quarter. In the '2025 Export Outlook Survey' conducted by the Korea Economic Association on 150 companies in 12 major export industries, exports this year are predicted to increase by only 1.4% compared to last year.

The Bank of Korea expects the current account surplus to decrease from $90 billion last year to $80 billion this year as the growth of exports slows. The surplus is likely to be maintained as imports are unlikely to increase significantly due to the impact of falling international oil prices. The service balance is expected to continue to be in deficit due to an increase in overseas travel.

Concerns About Employment Market Deterioration

With the slowdown in export growth, it is commonly predicted by the Ministry of Economy and Finance and major domestic and international institutions that this year's growth rate is likely to fall below the potential growth rate. Considering that Korea's potential growth rate is about 2%, a growth rate in the mid-to-late 1% range is expected.

The Ministry of Economy and Finance expects this year's economic growth rate to fall below 2%. The Bank of Korea (1.9%) and foreign investment banks (IB) also have a gloomy outlook. Recently, Citibank stated, "If the U.S. raises tariffs, it could negatively impact Korea's economic growth through exports to China, Canada, and Mexico," and presented a growth rate forecast of 1.6% for Korea this year. Other IBs such as Goldman Sachs (1.8%), UBS (1.9%), Nomura (1.7%), JP Morgan (1.7%), Barclays (1.8%), and HSBC (1.9%) also mostly forecast growth rates in the 1% range.

Experts expect domestic demand to improve moderately, focusing on consumption and facility investment. The Bank of Korea expects private consumption to increase by 2.0% this year, up from 1.2% last year. The facility investment growth rate is also predicted to rise from 1.5% last year to 3.0% this year.

The reason for expecting an increase in consumption and facility investment is the likelihood of reduced inflationary pressure. The Bank of Korea presented a consumer price inflation rate of 1.9% this year, lower than last year's 2.3%. The inflationary pressure from the supply side, such as international oil prices, is not high. However, if the won-dollar exchange rate remains at the 1,430 won level, the annual inflation rate is expected to rise by about 0.05 percentage points.

Experts warn that if the political strife surrounding the impeachment prolongs, domestic demand and investment sentiment may further weaken. There is also the possibility that the government may organize a supplementary budget to improve economic sentiment. Construction investment is expected to remain sluggish. According to the Bank of Korea, construction investment is expected to decrease by 1.3% this year, following a 1.3% decrease last year.

Due to the impact of low growth and sluggish construction, the employment market is also likely to contract. The Bank of Korea expects the increase in the number of employed people to decrease from 170,000 last year to 130,000 this year. While employment in the service industry is expected to continue to increase due to the expansion of demand for information technology (IT) and care services, employment in the construction and manufacturing industries is expected to decrease.

Park Sang-yong, Reporter yourpencil@hankyung.com