The economic performance of South Korea in the final quarter of 2024 revealed a significant slowdown, with an annual growth rate of 1.2%, marking the weakest expansion since mid-2023. Analysts had anticipated a slightly higher growth rate of 1.4%. Additionally, quarterly growth was tepid at just 0.1%, falling short of expectations. Despite these setbacks, the full-year GDP growth for 2024 reached 2%, showing some improvement over the previous year's 1.4%. The decline in private consumption and construction investment contributed to the sluggish performance, while government spending and exports provided modest support.

Economic Performance and Key Drivers

In the last quarter of 2024, South Korea's economy faced notable challenges, particularly in domestic demand and key sectors such as construction. Private consumption weakened, and investment in the construction sector declined, which significantly impacted overall growth. However, there were positive contributions from government spending, facility investments, and export activities. The manufacturing sector also showed resilience, growing faster than the previous year. This mixed performance highlights the complexities within the South Korean economy.

Specifically, the services and construction industries experienced reduced growth, while the manufacturing sector demonstrated strength. The Bank of Korea (BOK) noted that the slowdown in consumer spending was a major factor, with sequential growth dropping to 0.2% from 0.5% in the third quarter. Shivaan Tandon, an economist, pointed out that domestic demand remains the primary source of weakness. He anticipates that this trend will persist due to ongoing political instability and a bleak outlook for the construction sector. Tandon forecasts a growth rate of 1.1% for the coming year, well below the BOK’s projection of 1.6%-1.7% for 2025.

Monetary Policy and Consumer Sentiment

The Bank of Korea has responded to the economic challenges with strategic adjustments. In late November, it unexpectedly cut interest rates by 25 basis points, followed by maintaining rates at its January meeting. The current policy rate stands at 3%. The BOK warned of intensified downside risks to economic growth, increased exchange rate volatility, and slower export growth due to escalating political uncertainties. These factors are expected to hinder the recovery of domestic demand.

Consumer sentiment also took a hit, particularly after the short-lived martial law declaration by the impeached president Yoon Suk Yeol in December. The consumer sentiment index plummeted to its lowest level since November 2022, reaching 88.4 in December, indicating pessimism about the economy. Although it recovered slightly to 91.2 in January, it remained below the threshold of 100, signaling continued consumer pessimism. This subdued sentiment is likely to influence spending patterns and further impact economic recovery efforts.