Government's Optimistic Outlook on 'Gyeonggi Recovery' Disappears... Dark Clouds of 'Downside Risks'

The government's economic assessment has rapidly darkened within a month. Expressions such as 'economic recovery trend' have disappeared, replaced by pessimistic phrases like 'expansion of domestic and external uncertainties,' 'economic sentiment contraction,' and 'increased downside risks.' This is analyzed to be due to the growing domestic and external uncertainties, including the political turmoil caused by the emergency martial law situation ahead of the launch of Trump's second term next month.

Yonhap News

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On the 13th, the Ministry of Economy and Finance diagnosed in the 'Recent Economic Trends (Green Book) December issue' that "Although price stability continues in our economy recently, there are concerns about increased downside risks such as contraction of household and corporate economic sentiment due to the expansion of domestic and external uncertainties."

The government evaluated the overall economy as having 'increasing uncertainties.' This diagnosis is significantly different from last month. Since May, the government had maintained the assessment that the economy was showing a recovery trend. Even last month, although the term 'gradual' was included, the government maintained the judgment that the economic recovery trend continued.

However, the mood changed drastically this month. Following the withdrawal of the assessment last month that 'signs of domestic demand recovery are visible,' this month the government retracted the diagnosis itself that 'the economy is recovering.' Since May, the government had continued the judgment that domestic demand was showing a recovery trend.

Also, unlike last month, when the government expressed general concerns by stating "there are uncertainties due to changes in domestic and external conditions," this time it specifically pointed out the expansion of domestic and external uncertainties along with "concerns about increased downside risks such as contraction of household and corporate economic sentiment."

The government referred to the past situation in December 2016, during the impeachment of former President Park Geun-hye, when there were concerns about increased downside risks such as investment sentiment contraction caused by domestic factors, and used this as a reference to assess the current situation.

An official from the Ministry of Economy and Finance said, "There are uncertainties due to external shocks to the economy," and that the current situation "reflects concerns that downside risks may materialize or expand." They added that there "may be a time lag until related impacts appear in economic indicators."

This change in the government's perception is closely related to the current situation where political turmoil caused by the recent emergency martial law situation is intensifying. The increased political uncertainty after the emergency martial law situation is manifesting as increased volatility in financial and foreign exchange markets, raising concerns that it could lead to damage to the real economy.

Economic indicators are also showing a worsening trend. Looking at industrial activity trends, as of October, overall production indicators such as services and manufacturing were flat compared to the previous month, but expenditure sectors such as retail sales, facility investment, and construction investment all decreased. Retail sales fell by 0.4%, construction investment by 4.0%, and facility investment by 5.8%. Consumer and corporate sentiment also froze, with consumer sentiment (100.7) dropping by 1.0 point and corporate sentiment (91.5) falling by 0.6 points last month.

Price stability is being maintained. Last month, consumer prices rose by 1.5% compared to the same month last year, showing a stable trend. Last month, exports recorded $56.35 billion due to increases in semiconductors and ship exports, up 1.4% compared to the same month last year. However, as concerns about domestic demand continue, major institutions are lowering their economic growth forecasts for South Korea for this year and next year.

The government has begun preparing countermeasures. The government stated, "We will firmly maintain external credibility through cooperation among related agencies with the Economic Relations Ministers' Meeting as the control tower," and "Along with efforts to strengthen industrial competitiveness, we will promote measures to support livelihood stabilization."

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