[Yoo Choon-sik] Warnings over Korea's economy

Korea Herald

11-05-2025

Warnings about serious economic conditions do more than simply forecast impending difficulties — they serve as urgent calls to action, urging individuals, institutions and nations to adjust their course before a disaster strikes. These warnings are not just theoretical predictions but critical signals meant to prompt meaningful changes before circumstances worsen beyond repair.
One example of an advance warning having a positive effect is when an individual alters their lifestyle after receiving a doctor's caution about potential health risks. Often, timely intervention leads to improved long-term outcomes, helping people make better decisions before irreversible consequences set in.
The power of such warnings lies in their ability to shift perspectives and inspire people to take proactive measures rather than reacting only when problems have already materialized and it has become too late.
Yet history offers countless examples of individuals and nations disregarding warnings, only to suffer severe consequences. Whether economic downturns, environmental disasters or political instability, ignoring early signs has repeatedly led to crises that could have been mitigated or avoided altogether.
Some of the most catastrophic events in modern history were not sudden shocks but rather predictable outcomes of ignored warnings — failures in judgment that came at an immense cost.
Recently, a flurry of warnings from prominent institutions — both domestic and international — has flooded South Korean media, signaling deep concerns about the country's economic trajectory. These alerts underscore the urgent need for policymakers to take decisive action. The tone of these warnings suggests that the risks ahead are not minor fluctuations but fundamental weaknesses that demand immediate attention.
Private institutions such as the Hyundai Research Institute, the Korea Institute of Finance, JPMorgan Chase and Citigroup have sounded the alarm, forecasting that South Korea's economic growth could fall to below 1 percent this year, possibly to as low as 0.5 percent — far below the provisional 2.0 percent gain in 2024.
Even the International Monetary Fund, which used to take a conservative and cautious approach, slashed its growth forecast on South Korea's economy by a full percentage point. These estimates present a sobering picture: If drastic measures are not taken, South Korea's economy could enter a prolonged period of sluggish or even no growth.
In February, the Bank of Korea revised its own economic outlook downward, adjusting its projection from 1.9 percent to 1.5 percent — a rare shift occurring just months after its previous estimate. This unusually rapid revision came ahead of its original schedule set for May — an indication of deteriorating conditions.
Even after the unusually fast downgrade, the central bank's forecast — along with the Ministry of Economy and Finance's target of 1.8 percent growth — stands far above the predictions in the private sector. This gap in opinion could add to growing concerns within the financial community about the government's approach to economic challenges.
Should these predictions materialize, South Korea could see one of its worst economic performances in modern history — excluding periods affected by regional or global crises like the Asian financial crisis or the COVID-19 pandemic. The implications for businesses, employment and economic policy would be profound, potentially reshaping South Korea's position in the global market and influencing long-term domestic economic strategies.
South Korea's vulnerability is further compounded by recent global trade shifts. The Trump administration's surprise announcement of sharply higher tariffs on imports from all trading partners is expected to suppress US consumption of foreign goods, reducing exports from economies like South Korea that rely heavily on global trade. While the world has seen trade disputes before, the scale and unpredictability of this move introduce new layers of uncertainty, placing added pressure on export-dependent economies.
But the current economic anxieties run deeper than just external trade shocks. Many analysts point to fundamental missteps by the recent few administrations long before the Trump tariffs took effect. Years of ineffective monetary and fiscal policy, coupled with misguided financial and industrial measures, have left structural weaknesses unaddressed.
Negative growth ahead
Experts warn that failing to confront these systemic issues will only prolong economic instability. If South Korea does not address these underlying inefficiencies, even the best trade negotiations in the coming months with the Trump administration will do little or nothing to revive its economy.
The government's approach to the construction industry exemplifies policy failures. Faced with rising household debt and escalating housing prices, authorities focused solely on controlling prices and transaction volumes rather than tackling the root causes of the imbalance. This reactionary strategy, while seemingly effective in the short term, failed to address deeper structural issues such as speculative investment, supply shortages and financing inefficiencies.
Similarly, when problems arose with expanding project-financing debt, officials introduced a series of short-term measures simply to avoid a catastrophe, instead of crafting long-term policies that could stabilize the sector for years to come. This lack of a comprehensive approach has exacerbated economic difficulties, leaving the construction sector in turmoil.
As a result, the construction industry is experiencing its worst downturn in more than a decade. According to Statistics Korea, the industry's output index has declined for four consecutive quarters — a streak unseen since 2011, apart from the COVID-19 crisis. This extended slump highlights the fragility of one of South Korea's most important industries.
The output index fell to 85.5 in the first quarter of this year — the lowest since mid-2015 — down from 91.0 in the fourth quarter of 2024. The Bank of Korea's data further confirms the trend, showing that the sector's GDP contracted by 1.5 percent in the first quarter of this year, dragging down overall GDP by 0.2 percent. These figures demonstrate how vulnerabilities in one sector can ripple through the broader economy, worsening financial instability.
The ripple effects of this decline extend far beyond the construction sector. As a critical component of the economy, its downturn affects employment and the broader service industries that depend on it, including real estate, hospitality and materials production.
Ironically, the government's initial intervention in the housing market aimed to curb skyrocketing prices but ultimately deepened instability. The lesson here is clear: short-sighted regulatory measures that do not account for market dynamics can often lead to unintended consequences.
Instead of rigidly imposing price controls, policymakers should have pursued a broader set of strategic, long-term reforms to address underlying imbalances in the housing market. A more sustainable approach would have focused on adjusting market incentives rather than trying to artificially suppress prices. If South Korea is to achieve economic stability, its leadership must prioritize comprehensive policy frameworks over knee-jerk reactions.
Amid this troubling outlook, South Korea's most influential government economic think tank, the Korea Development Institute, released a sobering analysis. The report warns that the nation's potential growth rate probably has broken below 2 percent, partly due to an extended economic slump. This projection serves as a dire warning to policymakers that the current trajectory is unsustainable.
Even more alarmingly, projections indicate that South Korea's potential growth rate — the highest sustainable expansion without excessive policy interventions — could dip below zero by the late 2030s in the worst-case scenario. The prospect of economic stagnation, or even contraction, raises serious concerns about the nation's future.
Yet the economy is not doomed to stagnation. With strategic adjustments, South Korea can maintain positive growth for years to come, according to the same Korea Development Institute report. By reallocating resources to enhance productivity in the service sector and improving efficiency across industries, policymakers can chart a path toward stability. Economic resilience will require more than superficial reforms — it demands bold, coordinated action.
South Korea has been warned of an impending economic crisis many times before. But this time, the stakes feel higher. The timing of the Korea Development Institute's report is particularly crucial as the country enters the official campaign season for the early presidential election on June 3.
For South Korea's next government due to start work as early as June 4, the question is no longer whether decisive action is necessary — it's whether they will act swiftly enough. The country may already be late in addressing its economic troubles, but from a future perspective, now is the earliest moment to begin.
Yoo Choon-sik worked for nearly 30 years at Reuters, including as the chief Korea economics correspondent, and briefly worked as a business strategy consultant. The views expressed here are the writer's own. — Ed.