South Korea's economy showed signs of vulnerability as it grew by only 1.2% in the fourth quarter of 2024, falling short of analysts' expectations. Compounded by one of the worst political crises the country has faced in decades, the slow growth has led to predictions of increased government stimulus to bolster economic performance.
Data from the Bank of Korea (BOK) revealed the country's Gross Domestic Product (GDP) expanded by just 0.1% quarter-on-quarter, which is lower than the 0.2% predicted by economists surveyed by Reuters. Year-on-year, the growth rate of 1.2% for Q4 is significantly lower than the projected 1.4% and reflects the slowest growth rate since the second quarter of 2023.
Throughout 2024, South Korea's GDP showed positive growth at 2.0%, up from 1.66% the previous year. Despite this annual improvement, BOK forecasts growth to taper down to between 1.6% and 1.7% for 2025, which raises concerns about the sustainability of this upward trend.
The performance of consumer spending also suffered, growing just 0.2% compared to the much higher 0.5% seen in Q3. Meanwhile, corporate investments amounted to 1.6%, down from a notable 6.5%. This decline reflects hesitance among businesses amid prevailing uncertainties.
Construction investments dropped sharply by 3.2%, adding to worries of economic stagnation. On the export front, there was some respite as exports climbed by 0.3%, bouncing back from the previous quarter's 0.2% decline, primarily driven by the demand for semiconductors fueled by the rise of artificial intelligence technology.
The Bank of Korea is expected to respond to the economic slowdown by reducing interest rates, with predictions of at least three cuts throughout 2025. Analysts anticipate the first reduction of 0.25% during the scheduled policy meeting next month, potentially bringing the rate down to 2.25%. This proposed reduction aims to kickstart investments and consumer spending as the government grapples with the economic fallout from persistent political turmoil.
Some economists, such as Shivan Tandon from Capital Economics, caution against overreliance on government interventions. Tandon pointed out the lasting impact of South Korea's political challenges, emphasizing how weak domestic demand could prolong economic sluggishness, with projections for growth this year falling to 1.1%, below the BOK's outlook.
Given the severe impacts of the political climate on economic stability, many are calling for swift action to revamp the outlook for 2025. With growth expectations lowered and investment faltering, the South Korean government is under considerable pressure to implement effective measures to rejuvenate the economy.
The sluggish growth recorded during Q4 2024, coupled with the anticipation of unfavorable economic conditions, signifies worrying times for South Korea. Moving forward, how the government balances the need to stimulate economic growth amid political unrest will be pivotal for the resilience of its economy.