The Korea Herald

소아쌤

[Editorial] Uncertain outlook

S. Korea’s economic growth revised down amid growing concerns of Trump impact

By Korea Herald

Published : Nov. 15, 2024 - 05:30

    • Link copied

With former US President Donald Trump having prevailed in his bid for a second nonconsecutive term, a host of effects are hitting countries across the globe, and South Korea is no exception. In particular, Seoul’s financial markets are fluctuating amid growing concerns about future shocks linked to Trump’s trade policies.

The main bourse Kospi tumbled below the 2,500 level to close at 2,482.57 on Tuesday, down 1.94 percent from the previous day. Investors also worried about the weakening of the Korean currency against the US dollar, which broke the psychologically important 1,400 won level that had held for about two years.

The latest development in the foreign exchange market came as a shock for many investors and policymakers here, since South Korea had witnessed the 1,400 won exchange rate only rarely in history.

Perhaps the spike in the US dollar’s value is a temporary phenomenon shortly after Trump’s crushing win in the high-stakes US presidential election. Once things settle, the the won-dollar exchange might return to a normal level.

But there are skeptics on the mid- and long-term health of Korea’s financial market. In contrast to the upbeat mood of financial markets in the US, China, Japan and Europe, the overall mood of Korean investors remains gloomy, as major stocks continue to lose their value.

Many of the concerns stem from the prospect that the export-driven Korean economy may suffer a serious setback when Trump implements the policies he campaigned on, especially raising tariffs and cutting taxes that are feared to affect exchange rates and consumer prices around the world.

Negative responses to the second term of Trump’s presidency may be brushed off as the exaggerations of skeptics, but such a view is not limited to individual investors. For instance, the state-run Korea Development Institute on Tuesday revised down the country’s 2024 growth outlook from 2.5 percent to 2.2 percent. The KDI also slashed the 2025 growth outlook to 2 percent, down 0.1 percentage point from its previous projection.

In its outlook report, the KDI said that private consumption is expected to recover next year, but a slowdown in exports could drag the Korean economy into sluggish growth. Korea’s export volume has jumped by some 7 percent this year, but it is forecast to slow to growth of just 2.1 percent next year.

The Korea Institute for International Economic Policy said that if the incoming Trump administration imposes a 20 percent tariff on goods shipped from Korea, the total exports value could plunge by $44.8 billion. The assumption is that an increase in tariffs would be implemented from 2026. However, if the hike comes in 2025, Korea’s economic growth rate would likely fall below the 2 percent range. The KIEP noted that Korean policymakers take proactive steps in preparation for an earlier-than-expected rise in tariffs.

As Trump-related changes in trade terms are expected to hurt Korea’s major exporters in the fields of semiconductor, batteries and cars, the Yoon Suk Yeol administration has to devise ways to help those companies stay competitive in overseas markets.

Some experts argue that the Bank of Korea must slash benchmark interest rates to help bolster the nascent recovery in domestic demand. But the central bank may find it hard to do so, as there appear to be more uncertain variables than previously projected, especially the possibility that inflationary pressure may shoot up in connection with increased tariffs from the US and the lower value of the Korean currency.

Amid growing concerns about the Korean economy and financial market, there are many tasks that policymakers have to tackle without delay. The first step for the Yoon administration is to push for long-stalled policy and deregulation initiatives by working together with lawmakers of the opposition parties at the National Assembly.