NABO Economic Trends & Issues (No. 133)

Published on January 22, 2025
Published by Macro-Economic Analysis Division, Economic Analysis Department

■ Economic Trends
   In recent months, economic conditions have deteriorated in Korea due to the combination of weak domestic demand and decreasing exports. In particular, following the December 3rd emergency declaration of martial law, uncertainty has intensified as volatility increased in both the foreign exchange and financial markets.
   In November, production fell by 0.3% across all industries including manufacturing and services, and the cyclical component of the coincident index recorded a MoM decrease of 0.5 points. Retail sales increased by 0.4% MoM, thanks to an increase in sales of semi-durable goods. Facility investment declined by 1.6% MoM due to a continued decrease in machinery investment. On the fiscal side, the cumulative total expenditure recordedgrowth of 3.9% in November, slowing compared to the previous month. In December, the trade balance recorded a surplus of USD 6.49 billion with exports increasing primarily in semiconductors, and consumer prices climbed by 1.9% due to a continued increase in the won/dollar exchange rate.
   In December, the spread between the two-year treasury bond yield and the base rate was 41 basis points, and the KOSPI index continued to decline to close the year at 2,399.5. Corporate loans in October increased by KRW 10.6 trillion MoM, mainly led by SMEs, and the issuance of stocks and corporate bonds in November fell by 17.7% MoM. Household loans continued to increase in October, driven by mortgage loans. In November, the housing sales price index lost momentum, with housing transactions also decreasing from the previous month. In December, the won/dollar exchange rate surged significantly MoM to KRW 1,451 while foreign reserves increased slightly MoM to USD 415.6 billion.

■ Economic Issues: Downside Risks and Policy Conditions for the Korean Economy in 2025
   With growing concerns about the future outlook for the Korean economy in 2025 following the December 3rd emergency declaration of martial law, there is an increasing need for economic support measures from policy authorities including the government and the National Assembly. This paper reviews the downside risks to the Korean economy in 2025 and discusses future macroeconomic policy directions, drawing on lessons from the pastand economic outlooks issued by major forecast agencies around the December 3rd incident.
   The Korean economy has recently faced increasing downside risks due to a combination of weak domestic demand and declining export growth. To make matters worse, the declaration of martial law poured cold water on household and business sentiment and increased exchange rate volatility. In addition, uncertainties have grown in the global trade environment as the second Trump administration is expected to strengthen protectionist trade policies, such as tariffs and export controls. According to a review of Korea's experiences with the two previous presidential impeachments, political unrest, including impeachment, tends to have a greater impact on consumption than investment. In addition, since Q3 and Q4 in 2024, major domestic and global forecast agencies have adjusted Korea's economic growth rate downward by an average of 0.3% points. In light of this situation, the government is expected to address the economic slowdown by accelerating budget execution, and the Bank of Korea is likely to determine the pace of base rate cuts in accordance with future economic trends. The government will also pursue flexible monetary and financial policy measures tailored to economic conditions along with active fiscal policies such as supplementary budget allocations.