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'Reverse base effect' to challenge Korean economy in 2025

Published: 08 Jan. 2025, 20:00 Updated: 08 Jan. 2025, 21:59

Sohn Hae-yong

The author is the business news editor of the JoongAng Ilbo.

This year, already fraught with domestic and international challenges, brings yet another factor weighing on Korea's economy: the "reverse base effect" created by last year's leap year.

Last year had 366 days, thanks to the additional day in February. Leap years typically boost economic activity — businesses see higher sales and production due to the extra day. Assuming all other factors remain constant, a leap year can increase economic activity by approximately 0.27 percent. For example, Japan’s economy surprised markets with unexpected growth in the first quarter of 2016, a leap year, and analysts credited the additional day as a key contributor. Moreover, leap years usually coincide with global events like the Summer Olympics (for instance, last year’s Paris Games), which spur domestic consumption and sales.

However, the year following a leap year often suffers from a reverse base effect. Strong performance in the previous year skews comparative growth figures downward. As a result, Korea begins 2024 effectively 0.3% behind a standard starting line.

Even without the reverse base effect, Korea's economic prospects for this year appear bleak. Domestic consumption is reeling from compounded crises, including political turmoil surrounding impeachment trials and the fallout from the Jeju Air disaster. Externally, the protectionist policies of the second Trump administration in the United States exacerbate the situation. The exchange rate and stock markets are deteriorating, concerns over a downgrade in the national credit rating are rising, and business leaders worry about canceled export orders and postponed investments.

The Ministry of Economy and Finance recently forecasted a 1.8 percent growth rate for this year, reflecting various adverse factors: statistical anomalies like the leap year, domestic and global uncertainties, evolving international trade dynamics, and intensifying competition in Korea’s key industries. Export growth is expected to plummet to 1.5 percent, just one-fifth of last year’s 8.2 percent. The number of new jobs is projected to increase by only 120,000, a sharp decline from last year’s figure of 370,000. Since 1953, Korea’s growth rate has dipped below 2 percent only six times — during major crises such as the post-war year of 1956 (0.7 percent), the second oil shock in 1980 (minus 1.5 percent), the 1998 Asian financial crisis (minus 4.9 percent), the 2009 global financial crisis (0.8 percent), the first year of the COVID-19 pandemic in 2020 (minus 0.7 percent), and the semiconductor slump of 2023 (1.4 percent). This highlights the severity of the current economic landscape.

Despite these economic challenges, Korea’s political establishment appears preoccupied with power struggles, seemingly indifferent to the economic turmoil. Efforts to establish a bipartisan "joint consultative body" to stabilize governance have stalled, with even its name yet to be finalized nearly a month after discussions began. While political gridlock persists, the immediate priority should be to address the faltering economy.

The consultative body must act swiftly to prevent political instability from spilling over into an economic crisis. Contentious bills like the Corporate Governance Reform Act should be deferred, while priority should be given to legislation that supports domestic and export-driven industries, such as the Semiconductor Special Act and the Power Grid Act. For instance, removing contentious provisions, such as exemptions from the 52-hour workweek in the Semiconductor Special Act, could facilitate its passage and provide much-needed support to the industry.

Collaborative efforts are also essential to counter external threats, such as U.S. tariff hikes and Chinese dumping practices. The consultative body should demonstrate a united stance on economic and livelihood issues. Additionally, political factions must refrain from undermining macroeconomic and financial initiatives like the "F4 Meetings," which have helped stabilize Korea’s financial markets and international credibility in times of crisis.

Economic policymakers must focus on reviving domestic consumption to slow the economy’s downward trajectory. This includes initiating discussions on a supplementary budget. Given that the previously approved budget, reduced by the Democratic Party before martial law, is insufficient to maintain even the status quo, a supplementary budget should be finalized by the first quarter to avoid missing the critical window for recovery.

The Bank of Korea should also adopt proactive monetary policies. Coordinating interest rate cuts with increased fiscal spending could amplify the impact of these measures. However, fiscal and monetary policies should not be fixated on achieving the 1.8 percent growth target. Instead, efforts should focus on strengthening Korea’s economic fundamentals to counter the ongoing downturn, avoiding short-term measures that might lead to unintended consequences.

As the saying goes, "A crisis foreseen is no crisis at all." The risks facing Korea’s economy this year have long been anticipated, meaning their impact can be mitigated with effective responses. While Korea has faced turbulence before, it has never capsized — and it won’t this year either.

Translated using generative AI and edited by Korea JoongAng Daily staff.