Economic uncertainties to continue despite Yoon's ouster

The streets of Myeong-dong in Seoul are nearly empty, Feb. 3 Yonhap

The government should introduce a supplementary budget quickly to prop up the faltering economy, certain to stagnate further despite the removal of former President Yoon Suk Yeol on Friday, economists and market analysts said Sunday.

The recommendation comes amid concerns over a leadership vacuum in overall policy direction, further compounded by the Trump administration’s plan to impose 25 percent tariffs on all Korean goods.

Also concerning are sluggish private consumption and infrastructure investment, along with rising youth unemployment. Consumer and business sentiment is expected to remain subdued until after the presidential election scheduled for early June, the experts said.

“The government should draft about 30 trillion won ($20 billion) in extra budget,” Pinnacle Economic Research Institute chief economist Chang Jae-chul said. “Korea is facing heightened risks of a sharper economic downturn, hamstrung by weak domestic demand and Trump tariff threats hurting the country’s key exporters.”

Any further delays in the extra budget implementation will accelerate the risk of a slowdown, said the former economist at Citibank Korea and KB Securities. “The economy will take a heavier-than-expected blow without a major course correction in the years of conservative fiscal spending mandate under the former Yoon administration."

As of the fourth quarter of last year, retail spending as measured by Statistics Korea data registered a contraction for the eleventh quarter.

“The economy is on a downtrend for the past few years, with consumers feeling the pinch of consistently high prices and borrowing costs. Extra fiscal spending is needed to counter or at least slow down the pace of the worrisome ongoing trend," Chang said.

Rallies for and against the ouster of former President Yoon Suk Yeol take place in Gwanghwamun, Seoul, Saturday. Yonhap

Hyundai Research Institute economist Joo Won also said the political parties should reach an agreement on the swift implementation of additional spending.

“Two months of leadership vacuum can result in overall economic damage that is hard to recover from, especially in the context of tariff uncertainties,” he said. "With uncertainties and unpredictability abounding, businesses will delay major investment decisions and consumer confidence will take a dive for some time. Now is the time to put in place fiscal spending to help the economy rebound faster.”

Shortly after the Constitutional Court upheld Yoon's impeachment on Friday, Deputy Prime Minister and Finance Minister Choi Sang-mok urged the National Assembly to pass a 10 trillion won extra budget this month for swift implementation.

According to the Korea Center for International Finance, the growth forecasts for Korea made by eight global investment banks averaged 1.4 percent as of the end of March, down from 1.6 percent a month earlier.

Hana Bank said the Donald Trump administration's 25 percent tariffs could slash Korea’s U.S. exports by 13 percent, translating to over 10.6 trillion won in loss of value-added output.

A research institute under the state-owned lender Industrial Bank of Korea stated that Korea's exports to the U.S. would drop by 12.8 percent, and the total export volume would decrease by 4.6 percent under Trump's 25 percent tariffs.

It said the hardest-hit industries will be automobiles and general machinery, which are expected to contract by over 18 percent and 39 percent, respectively.

The growth of the country’s chip exports to the U.S. will be limited to 1 percent.

A KB Kookmin Bank report also said Korea’s industries will see up to a 4 percent decline in operating profit due to the Trump tariffs.