Daunting economic tasks lie ahead for new president

Korea Herald

2 days ago

As external shocks threaten recovery, new leadership faces race against time to activate economic engines through fiscal, industrial moves
The newly elected Korean president faces mounting external challenges as well as internal economic pressures, prompting a comprehensive push on both financial measures and industrial strategies to steer the country toward growth.
The new government inherits a fragile economy now facing sluggish growth prospects, with recent data indicating declines across production, consumption and investment, all aggravated by external shocks.
Korea's future hinges on how effectively it fights US-led tariffs and accelerates its tech leadership, as Seoul's biggest challenge now is turning policy promises into a tangible economic bounce.
Mission to revive domestic demand
Korea's economy is showing signs of slowing down, with domestic demand sputtering due to sluggish construction and shrinking investment in equipment and facilities.
The latest forecasts from the Bank of Korea have sharply downgraded growth expectations to around 0.8 percent, fueling fears of zero growth this year.
As the outlook darkens, the new leader will face a critical challenge of translating commitments into concrete measures to revive the economy.
In response, the next financial authorities are expected to ramp up efforts to carefully balance sizable fiscal stimulus with an accommodative monetary policy.
On the monetary front, the Bank of Korea responded swiftly last week, cutting its key rate from 2.75 percent to 2.5 percent in an effort to stimulate spending.
Kim Jin-wook, an economist at Citigroup, noted that Korea's economic outlook remains challenging, expecting deeper cuts this year.
'We expect the Bank of Korea to pursue a rate-cutting cycle, with a 25-basis point cut each in August 2025, November 2025 and February 2026, toward a 1.75 percent terminal rate,' he said.
Kim warned that the cumulative negative effect of US tariffs on Korea's gross domestic product growth for 2025-26 is projected to be among the most severe, compared to other major economies.
The upcoming administration is already contemplating at least 30 trillion won ($21.8 billion) in a second extra budget, prioritizing rapid deployment in sectors like small business, construction and social programs.
If the supplementary budget is enacted, the growth rate could increase by 0.4 to 0.5 percentage point, according to an estimate from the Hyundai Research Institute. Based on the BOK's growth outlook, this could raise the forecast to the low 1 percent range.
The new government's focus on fiscal stimulus is expected to target immediate needs, including supporting small retailers, which are suffering from declining consumer sentiment and soaring rent and labor costs.
Infrastructure and urban renewal projects are set to receive prioritized investments to generate quick employment and economic activity.
Tariff battle and tech leadership
Korea's industrial sector faces its own set of urgent challenges with the escalation of US-led tariffs, initially targeting autos, steel and aluminum has already begun to hit exports hard.
In May, shipments to the US shrank sharply, with auto exports plunging 32 percent annually and steel, auto parts also experiencing double-digit declines. The risk of future US measures raising tariffs to 50 percent remains a concern, especially for the steel industry, which accounts for about 13 percent of Korean exports.
Negotiations with the US, which began in April, are focused on creating a 'July Package' that could lift tariffs before the current suspension expires on July 8, potentially saving key industries from further damage.
Beyond trade issues, Korea must bolster its strategic industries such as semiconductors and artificial intelligence.
Semiconductors, long a backbone of Korea's export-driven economy, have seen a global market share decline over the past five years, according to the Korea Institute for International Economic Policy, despite various government support measures, including tax credits for R&D.
Experts argue that these measures need to be significantly enhanced, with increased subsidies and incentives to match those offered by the US, Japan and China.
Artificial intelligence is also an area the new administration should swiftly address, as it represents both a key driver of future economic growth and a critical component of national competitiveness in the era of digital transformation.
'Regulatory reform must go beyond rhetoric. The new president should maintain the existing system which evaluates regulations that are in place, not just imposing new ones,' said Yang Jun-seok, an economics professor at Catholic University of Korea.
Removing unnecessary regulations will be part of the foundation for nurturing Korea's next-generation industries in emerging sectors such as AI, robotics and biotechnology, according to Kim Tae-il, a public administration professor at Korea University.
"With global competitors accelerating support for these strategic technologies, Korea cannot afford to fall behind."