04-04-2025
Yoon Suk Yeol's ouster clears path for economic stimulus, but tariff fears linger
Fiscal support seems likely, but monetary easing may hinge on external shocks, inflation
The Korean Constitutional Court's decision to uphold the impeachment of President Yoon Suk Yeol has alleviated some degree of political uncertainty while paving the way for stimulus measures designed to buoy domestic consumption, experts said on Friday.
The past four months have seen Asia's fourth-largest economy embroiled in its worst political turmoil in decades, following Yoon's brief attempt to impose martial law last December, which further undermined domestic demand and exports.
"The resolution of political uncertainty, coupled with strengthened monetary and fiscal policy initiatives, is anticipated to swiftly enhance consumer sentiment," said Lee Kyung-min, a strategist at Daishin Securities.
The impending early presidential election, expected by early June, could also elevate voter expectations and accelerate discussions on a supplementary budget, he added.
Despite the ruling removing a key risk factor, apprehension around the adverse effects of tariffs imposed by US President Donald Trump persists.
"The Constitutional Court's decision presents short-term benefits for the economy, such as potential rate cuts and extra budget allocations to lift (gross domestic product). Yet, prolonged US tariff issues could sharply reduce GDP growth," commented Seo Sang-young, a strategist at Mirae Asset Securities.
Seo highlighted that the universal 10 percent duty announced by Trump would dampen global cargo volume — a significant concern for export-reliant Korea.
As US tariffs loom, the Bank of Korea is expected to lower its 2025 GDP forecast further, which was already downgraded to 1.5 percent in February from 1.9 percent in November.
'Although we see potential scope for negotiations to decline from a 25 percent US reciprocal tariff on Korea to a 10 percent baseline, considering the Trump administration's often transactional approach, the timing of the Korea-US trade deal could be delayed to the third quarter this year as Korea's new administration will likely be formed on June 4,' said Citi economist Kim Jin-wook.
Analysts foresee additional fiscal measures following a proposed 10 trillion won ($7 billion) supplementary budget. The government has sought bipartisan support for the extra budget bill to support exporters and deal with the repercussions of the recent wildfires in southeastern Korea.
'With the Democratic Party already holding a majority of seats in parliament, we expect more progressive policies and an expansionary fiscal policy,' said Kang Min-joo, senior economist at ING.
Some analysts believed that the Bank of Korea would pause its rate cut cycle in the April meeting to keep it unchanged at 2.75 percent.
With the country's inflation unexpectedly rising to 2.1 percent year-on-year in March, the central bank faces some difficult decisions as inflation pressures collide with currency weakness and sluggish domestic demand.
'The stabilization of the Korean won and the delay in fiscal support will prompt the BOK to cut rates in May. But, if the US tariffs weigh on the Korean economy more than expected, the timing of the BOK's rate cut could be accelerated,' Kang said.
Kang Seung-won, an analyst at NH Investment and Securities, also predicted a possible policy rate cut in May, though political turmoil might push the timing to the third quarter. "Given the anticipation of stagnant first-quarter GDP figures, the likelihood of a May rate cut remains elevated,' he said.
