Domestic Demand Shrinks Amid Martial Law and Impeachment... "Worse Than During Park's Era"

A national research institute has diagnosed that the instability in domestic politics, exacerbated by recent martial law and the impeachment situation, is also shrinking the economy. Compared to the impeachment situation of former President Park Geun-hye in 2016-2017, the volatility in the financial market is smaller, but the economic sentiment of households and businesses is more significantly affected.

The Korea Development Institute (KDI) evaluated the recent Korean economy in its 'KDI Economic Trends (January issue)' released on the 8th, stating, "As the production growth rate slows and the economic improvement is delayed, the downside risk to the economy is increasing due to the contraction of economic sentiment amid expanding uncertainty."

Although semiconductor production continued to show a high growth rate, production and exports outside of semiconductors are slowing, and domestic demand, centered on the construction industry, is showing a weak trend, according to KDI's diagnosis. Construction production in November last year recorded -12.9% following the previous month's -10.8%, showing a sluggish trend, and total industrial production also decreased from 2.4% to -0.3%. The inventory ratio remains high at 111.8%, following the previous month's 112.3%.

KDI also mentioned the recent domestic political situation leading to martial law and the impeachment situation. KDI analyzed, "While external uncertainty is expanding, the domestic political situation is also deteriorating economic sentiment," and "Despite the recent political instability, the fluctuations in financial market indicators such as exchange rates and stock prices have remained at a limited level, but the sentiment indices of households and businesses have fallen sharply."

KDI assessed that the fluctuations in financial indicators are limited compared to the impeachment situation of former President Park. The basis is that the rise in the won-dollar exchange rate since President Yoon Suk-yeol declared martial law on December 3 last year is about 5%, which is more limited than the rise during the past political instability period (after October 24, 2016) of 7%. The CDS premium also rose by 4bp, which is smaller than the past (14bp). The CDS premium is a figure that shows the risk of national default, and the higher it is, the greater the possibility of the country going bankrupt.

The problem is the contraction of household and business sentiment. The consumer sentiment index in December last year, when President Yoon declared martial law, was 88.4, dropping by 12.3 points in just one month. Considering that the consumer sentiment index fell by 9.4 points over three months during the impeachment situation of former President Park, the speed and magnitude are both greater. The business sentiment index also showed a larger decline than in the past.

KDI expressed concern about the housing market, saying, "It suggests the possibility of a housing supply shortage centered on the metropolitan area in the future." The cumulative number of housing starts in the metropolitan area from January to November last year (135,000 units) is also less than the cumulative average of the last three years (2021-2023) of 175,000 units, and the housing permits in the metropolitan area (116,000 units) are also below the cumulative average of the last three years of 179,000 units.

Lee Kwang-sik, Reporter bumeran@hankyung.com