New president faces growth below 1% with economy in free fall

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New president faces growth below 1% with economy in free fall

Published: 03 Jun. 2025, 21:04 Updated: 03 Jun. 2025, 21:56

Audio report: written by reporters, read by AI

A view of downtown Seoul seen from Namsan in central Seoul on June 3 [YONHAP]

The Korean economy, awaiting a new president, is in one of its toughest states in recent history. From the outset, the government is facing growth below 1 percent, coupled with sluggish domestic demand and trade uncertainty. Adding to the challenge is the looming prospect of a third consecutive year of tax revenue shortfalls, tightening fiscal capacity.

A government beginning its term with growth around zero percent is unprecedented since the Kim Dae-jung administration, which came in during Asian financial crisis that started in 1997. The Park Geun-hye administration started with a 3.3 percent growth rate, the Moon Jae-in administration with 3.4 percent, and the Yoon Suk Yeol administration with 2.7 percent.

Growth below 1 percent has only since occurred in the aftermath of the 2008 global financial crisis and in 2020 during the Covid-19 pandemic. Experts say today's economic conditions are even more dire.

“At that time [in 2009], Korea’s potential growth rate was in the 3 percent range,” said Kang Sung-jin, an economics professor at Korea University. “Now, potential growth has fallen below 2 percent, meaning the economy has much less capacity to recover.”

Lee Yoon-soo, an economics professor at Sogang University, added, “We’re facing a combination of an economic downturn and structural low growth.”

Domestic demand, already under pressure from prolonged inflation and high interest rates since the pandemic, is now visibly contracting. Domestic demand’s contribution to the GDP fell from 4.1 percentage points in 2021 to 2.7 percentage points in 2022, 1.4 percentage points in 2023 and just 0.1 percentage point in 2024. In the first quarter of this year, it slipped further to negative 0.6 percentage points.

Retail sales from January to April of this year dropped 0.2 percent from the same period last year — marking a third straight year of decline. With consumption failing to rebound, small business owners are increasingly squeezed. Average quarterly sales for self-employed business owners fell 0.72 percent on year, while applications to shutter businesses have surged by 64.2 percent during the same period.

“The crises that built up after a poor response to Covid-19 are now erupting all at once,” said Woo Suk-jin, an economics professor at Myongji University.

The construction sector — widely regarded to be in its worst shape ever — is raising further concern. The Bank of Korea projects a negative 6.1 percent growth in construction investment this year, the lowest since a negative 13.2 percent drop during the 1998 financial crisis. Structural decline in manufacturing hubs like the Yeosu Industrial Complex in South Jeolla is also fueling broader concerns about the real economy.

Meanwhile, risks tied to real estate project financing remain unresolved. With construction firms, brokerages and savings banks deeply entangled through guarantees and loans, the possibility of defaults triggering a chain reaction across the financial sector is increasing.

For now, lagging indicators like employment data present a cause for cautious optimism. The April unemployment rate stood at 2.9 percent — indicating near-full employment.

But sentiment on the ground is deteriorating quickly. One clear sign is the number of young people who reported "taking a break.”

A jobseeker looks at notices at a welfare center in western Seoul on March 17. [YONHAP]

According to Statistics Korea, 504,000 Koreans aged 15 to 29 gave that response in February — surpassing 500,000 for the first time since records began. At the same time, the employment rate among people in their 50s, considered the backbone of the Korean economy, has declined for 12 consecutive months.

“Employment figures can look good due to government jobs that are temporary or targeting older adults,” said Sogang Prof. Lee. “But with no creation of new industries or quality jobs, job prospects for the youth are worsening.”

Korea’s export engine — long a critical driver of the economy — is also slowing.

Exports in May dropped 1.3 percent from a year earlier. Auto exports, a key sector, have struggled, while shipments to the United States fell by around 8 percent compared to the same month last year, reflecting the impact of tariffs imposed by U.S. President Donald Trump. Protectionism, as well as ongoing friction between Washington and Beijing, are further weighing down Korea’s outlook.

The time left for the Seoul-Washington tariff negotiations — seen as vital to Korea’s export sector — is now barely a month.

A pedestrian walks by a restaurant in Jung District, central Seoul, on June 3, the day of the 21st presidential election. [NEWS1]

With countries like Japan and India making faster progress in their talks with Washington and the United States sticking to its position that no further extensions will be granted beyond July 8 — the end of a mutual tariff suspension period — Korea has little room to maneuver. Citing the launch of a new administration to request a “grace period for the grace period” is no longer a viable option.

What makes this economic crisis even more burdensome for the new administration is the limited fiscal room. When youth unemployment surged under the Moon Jae-in administration, a Presidential Committee on Jobs was launched on day one, and a 10 trillion won ($7 billion) supplementary budget was ordered immediately. That year, the government also recorded a tax surplus of 14.3 trillion won, leaving ample fiscal room.

But this time is different. A third straight year of tax revenue shortfalls is expected, and the national debt-to-GDP ratio — in the 30 percent range during the Park Geun-hye era — has steadily climbed to over 50 percent.

“We’ve never seen household, corporate and government debt accumulate to this degree,” said Kim Sang-bong, an economics professor at Hansung University. “Debt can support growth to a point, but right now, it has become a risk factor.”

Experts agree that the new administration must conduct a swift and detailed review of the economic situation and prioritize its responses to avoid missing the golden window of opportunity.

Senior citizens wait in line for their free meal near Tapgol Park in central Seoul on May 12. [NEWS1]

“The government should structure its economic policies on 100-day, one-year and five-year timelines and implement them in order,” said Woo of Myongji University.

Lee of Sogang University emphasized the need for a clear economic vision.

“If the public doesn’t believe in the country’s growth prospects, no amount of stimulus will revive consumption,” he said. “The new government must focus less on short-term stimulus and more on presenting a clear path forward. That’s how public sentiment and the broader economy can recover.”

Translated from the JoongAng Ilbo using generative AI and edited by Korea JoongAng Daily staff.
BY KIM YEON-JOO [[email protected]]