The South Korean economy has started a turbulent new year with the leadership vacuum created by the impeachment of President Yoon Suk Yeol, while US President-elect Donald Trump is poised to shake the foundations of global trade.

Forecasts are murky. Growth is expected to dip below 2 percent, with exports continuing to slow and domestic demand showing only a sluggish recovery.

The increasing trade barrier and consequent distortion of production following Trump’s inauguration will weigh on Asia’s fourth-largest economy, while a strengthening US dollar is likely to weaken the Korean currency further, worsening the investment climate.

The Korea Herald interviewed global economists Barry Eichengreen, an esteemed economics and political science professor at the University of California, Berkeley, and Greg Buchak, who teaches finance at Stanford University, to share their insights on the country's economic outlook for 2025.

"These factors will weigh on the economy, alongside concerns like a belligerent North Korea and an overvalued dollar impacting global markets. However, Korea benefits from key advantages, including its vital role in global semiconductor supply chains and electric vehicles,” Eichengreen said via email.

Retaining its position as a technology powerhouse and major cultural exporter would require tolerance to trial and error, according to Buchak.

A core issue underlying Korea’s myriad economic challenges is declining productivity, and both economists emphasize that addressing this is a long-term endeavor, rooted in a high-pressure society that stifles creativity and innovation.

Korea has been embroiled in political tumult since Yoon's failed attempt to impose martial law on Dec. 3, leading to volatility in the stock and currency markets as foreign investors orchestrated a string of sell-offs.

Eichengreen said foreign investors who were caught off guard by the recent political turmoil are factoring in downward risks when making decisions.

“While Korea’s reputation with the international community can be repaired by restoring political stability — such as electing a moderate president next time — (full) restoration will take time, even under the best circumstances,” he said.

The legislature’s rejection of martial law, and Yoon and the military’s respect for the result, took the worst-case scenario of a democratic breakdown off the table, according to Buchak.

“While uncertainty remains, it is more a typical election-related political drama rather than doubts about Korea’s general stability," he said.

Concerns have been roiled that the export-reliant Korean economy would bear the brunt of Trump’s hard-line tariff policy and trade protectionism following his inauguration on Jan. 20.

Korean companies are expected to come under pressure as Trump’s return to the White House intensifies the trade war between the US, Korea's security ally, and China, its main trade partner.

“South Korea is in a very delicate position. it needs to stay close to, or be on harmonious terms with, the US, both economically and geopolitically, without overtly antagonizing China,” Eichengreen said.

The professor said seeking a balance between the world’s two largest economies would be a crucial task for Korea. “There is a real danger that Trump will say 'You can either invest here or invest in China; I won't allow both.' Or that he will react against Korea's continued investment in China by slapping tariffs on Korean exports to the US.”

Buchak said he believes trade barriers rise further as many countries are starting to push back against large exporters, particularly China, as it harms their domestic industries.

“Global cooperation to reduce trade barriers and align industrial policies would be the best response. But when coordination is difficult, each country is left going its own way,” he said. "What's optimal for Korea in the face of global protectionism is probably local protectionism."

With major economic institutes here and abroad projecting the Korean economy to expand at 1-2 percent, some experts have suggested that Korea may follow in the footsteps of Japan’s lost decade, in which a postbubble recession preceded tight fiscal and monetary settings, amid an aging population.

Buchak pointed out the soaring price of "jeonse," a uniquely Korean home rental system in which tenants pay a lump sum deposit to the landlord and get it back upon moving out, centering on Greater Seoul, could hinder long-term stability.

"A big part of Japan's situation was the bursting of their real estate bubble and very slow, long-term deleveraging. While some of these issues are present in Korea, they don't seem to be as acute.”

He said the jeonse system could induce hidden leverage and increase vulnerability to small falls in price.

“Real estate prices in Seoul have been rising very quickly, while prices in the rest of the country have been more moderate, or even declining. The long-run dynamics point to an inevitable decline in demand for housing in Seoul, perhaps some decades later, and when this leads to price declines, the Korean financial system will be stressed.”

Korea’s economic growth has slowed as catch-up opportunities have been exhausted and competition from China has intensified, Eichengreen said.

“The demographic challenges Korea faces resemble Japan's, with Korea's situation even more worse. However, there's no reason for a 'lost decade,' provided there are no major monetary or fiscal policy missteps, which were key factors in Japan's slump,” he said.

Eichengreen showed his particular belief that the Korean economy should reform the services sector to ride out stagnant innovation and boost competitiveness.

“Korea’s service sector productivity and service sector productivity growth has continued to lag. ... Addressing this problem should be a priority.”

“Some progress has been detected in Korea's efforts to create a more vibrant start-up culture. But more needs to be done to reform the education system to focus less on test-taking and grade-getting and more on original thinking,” he added.

Another factor that forbodes a bleak outlook for the Korean economy is that the country has officially become a "superaged" society, as the share of its population aged 65 or over recently surpassed 20 percent.

“The birthrate question may be the most important policy question of the 21st century. Birthrates are falling everywhere, although Korea is the worst case,” Buchak said.

For the economic causes, which he believes are easier to address than the social causes, subsidies or child care could be helpful, as many parents cannot afford to take the time off their jobs to raise their kids.

More importantly, Korea’s highly competitive society creates problematic consequences, Buchak assessed.

“I understand that career, status, and achievement in socially sanctioned ways are very important in Korea, and having children often interferes with this progression. Even financially stable families may hesitate to have children as it interferes with how their coworkers perceive them and their career trajectory.”

Such a high-pressure environment leads prospective parents to hesitate to raise children amid constant schooling and competition.

“Stagnant technological innovation is in fact quite related to the birth-rate issue, which ultimately traces back to high-pressure society, as innovation and creativity requires space for experiment and failure. You can't keep turning up the pressure and expect more creative innovation to flow,” he said.

“Korea needs to cultivate a healthy culture where attending a prestigious university or working at Samsung isn’t seen as the only path to success.”