Korea confronts near-zero growth, seeks balanced stimulus measures

Home > Opinion > Editorials

Korea confronts near-zero growth, seeks balanced stimulus measures

Published: 30 May. 2025, 00:00

Audio report: written by reporters, read by AI

Bank of Korea Gov. Rhee Chang-yong strikes the gavel during a Monetary Policy Board meeting at the central bank’s headquarters in central Seoul on May 29. [YONHAP]

The Bank of Korea’s Monetary Policy Board lowered the benchmark interest rate by 25 basis points to 2.50 percent on Thursday. It also slashed its annual growth forecast to 0.8 percent — half of its projection in February — marking a sharp deterioration in Korea’s economic outlook.

This places Korea’s economy in 0-percent territory for only the fourth time since democratization. The other instances were during the 1998 Asian financial crisis (-4.9 percent), the 2009 global financial crisis (0.8 percent) and the 2020 Covid-19 pandemic (-0.7 percent). A combination of plummeting exports, triggered by U.S. President Donald Trump’s tariff policies and weakening domestic demand has already resulted in negative growth for the first quarter. The export-driven Korean economy, hit hard by global shocks, now faces added political instability following former President Yoon Suk Yeol’s imposition of martial law and subsequent impeachment.

Given the financial pressure on households, swift economic support is needed. The problem is that the government has limited tools. Conventional stimulus — boosting fiscal spending and lowering interest rates — requires policy space that Korea may not have.

The fiscal environment is constrained. National debt hit a record 1,175 trillion won last year. The Korea Development Institute recently advised the government to be cautious about expanding expenditures. Democratic Party candidate Lee Jae-myung has called for an emergency supplementary budget to “extinguish immediate fires,” though he has not specified an amount. The party previously suggested a second supplementary budget of at least 20 trillion won. People Power Party candidate Kim Moon-soo has pledged a 30 trillion won package if elected.

Regardless of who takes office, a second supplementary budget totaling around 30 trillion won appears likely. If fully financed by government bonds, Korea’s national debt could rise to nearly 1,311 trillion won by year’s end. Handouts, such as local currency vouchers, must be kept to a minimum. Spending should be tightly focused and efficient. With tax revenue falling short for two consecutive years and more shortfalls expected due to low growth, budget adjustments and minimizing unused expenditures will be essential.

Lawmakers vote to pass the first supplementary budget for 2025 during a plenary session at the National Assembly in Yeouido, western Seoul, on May 2. [YONHAP]

Monetary policy is also constrained. Bank of Korea Governor Rhee Chang-yong signaled the potential for additional rate cuts but expressed concern about rising household debt and volatility in the Seoul real estate market. He acknowledged that sharp rate cuts during the pandemic were a “mistake” that inflated asset prices. Rhee emphasized that the overheated property market must eventually cool, and expressed caution about supporting the construction sector.

The new administration must prioritize effectiveness while minimizing side effects. Calls for dramatic stimulus should be avoided. Responsible fiscal management and a sober approach to monetary policy will be essential in navigating this fragile moment.

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