Until just a few weeks ago, whenever acquaintances of mine running their own businesses mentioned in private meetings or casual conversations that domestic demand was weak and getting weaker to an unprecedented degree, I assumed they were merely complaining under their breath.

However, one statistic after another released has forced me to admit that I was gravely mistaken and to feel regret for failing to sympathize with those enduring such hardship. Domestic demand is indeed weakening by the day, at a time when South Korea is bracing for one of the toughest periods in its history.

According to the monthly labor market data released last week, the number of employed people declined by 52,000 in December 2024 compared to the same month the previous year. This marked a sharp reversal from a gain of 123,000 recorded in November and represented the first such decline in nearly four years since the COVID-19 pandemic pushed the global economy into a severe slump.

Employment data is widely considered a lagging indicator, reflecting long-term or structural trends in economic performance because employers typically do not make decisions about their workforce based on a single month’s situation. However, employment data also reflects future prospects for the overall economy and specific business sectors.

Other indicators also paint a bleak picture of where domestic demand stands and where it is headed. The retail business survey index, compiled by the Korea Chamber of Commerce and Industry, fell to 77 for the first quarter of 2025 from 80 in the preceding quarter. This marked its third consecutive quarterly decline, reaching its lowest level since the third quarter of 2023.

Retail businesses are vital to South Korea’s economy, not only because they represent a significant portion of lower-income earners, but also because their struggles come at a time when exports are expected to stagnate in 2025 due to the likely deepening of trade protectionism under the new US administration.

The Bank of Korea’s consumer sentiment index, a leading indicator for consumer spending in the months ahead, also plunged in December to 88.4 from 100.7 in November. This was its lowest level since November 2022 and the steepest monthly decline since March 2020, according to the central bank.

Similarly, the central bank’s all-industry business survey index tumbled in December to 82.4 from 89.7 in November. This marked the fifth consecutive monthly decline in the index and its largest monthly drop since early 2020. Policymakers attribute these mainly to the political instability triggered in early December by President Yoon Suk Yeol’s failed attempt to impose martial law.

There is no denying that uncertainty is the worst enemy for economic players, from consumers to companies, as it prevents them from making long-term plans or even immediate decisions while they remain unsure about how events will unfold.

However, we cannot attribute all the blame to the current political turmoil, as the economic downturn had already begun months before President Yoon’s shocking announcement on Dec. 3 last year. While exports appeared to perform relatively well due to the "low-base" effect, domestic demand has never been robust.

The political turmoil has been so shocking and devastating that some people may believe it has caused all the current problems. Yet, we must be as careful and thorough as possible when analyzing such a complex issue as the economy if we are to find effective solutions.

If we fail to make a rational and comprehensive assessment of the problem, we cannot identify the right solution. This not only renders efforts ineffective but risks plunging the economy deeper into recession. The truth is that a series of indicators has already highlighted the shortcomings of the government’s economic policies since Yoon’s inauguration in May 2022.

Economic growth stood at 2.7 percent in 2022, the year the current administration took office, but fell to 1.4 percent the following year -- the worst performance in modern South Korean history except during global or regional crises. The government blamed various factors for the poor performance and forecast a handsome rebound to over 2 percent of growth in 2024.

However, last year’s growth now appears set to fall well short of that projection. The Bank of Korea said last week after its first monetary policy meeting of the year that growth in 2024 could turn out to hover around just 2 percent. Despite this grim outlook, the central bank kept interest rates unchanged, defying analysts' consensus expectations for a cut.

Remarks by Gov. Rhee Chang-yong suggested that the central bank probably worried that further cuts in the interest rate, following reductions at the previous two consecutive meetings, could severely impact the value of the won, already weakened by foreign sell-offs amid the political instability.

While the Bank of Korea may have preferred to wait for the government to introduce fiscal stimulus packages soon, timing is critical in economic policy. The longer action is delayed, the greater the eventual cost.

The problem is not only that the central bank did not lower the interest rates. Even if the central bank’s judgment was right, it could have persuaded the government to at least commit itself to a fiscal stimulus package coming in the near future, instead of saying that it will wait for another month.

Yoo Choon-sik

Yoo Choon-sik worked for nearly 30 years at Reuters, including as the chief Korea economics correspondent, and briefly worked as a business strategy consultant. The views expressed here are the writer’s own. -- Ed.