Economic Concerns in South Korea

By Jihoon Lee

SEOUL (Reuters) – South Korea’s factory activity contracted in December, marking a shift in manufacturer sentiment to pessimism for the first time since mid-2020. This change is attributed to uncertainties surrounding U.S. trade policy and domestic political issues, as revealed in a private sector survey conducted on Thursday.

The Purchasing Managers’ Index (PMI) for manufacturers in Asia’s fourth-largest economy, compiled by S&P Global, dropped to 49.0 in December from 50.6 in November. This fall registered below the 50-mark, which delineates expansion from contraction, for the third time since August.

Output has decreased for the fourth consecutive month, with a sharper decline compared to the previous month, coupled with a drop in new orders, as indicated by the sub-indexes.

The survey links the decline in demand to weakening client confidence within the domestic market, although export orders saw only minimal growth.

Manufacturers’ outlook for the upcoming year also turned gloomy, dipping below the 50-threshold separating optimistic from pessimistic views for the first time since July 2020, reflecting the lowest sentiment observed in 4-1/2 years. Excluding the COVID-19 pandemic timeframe, this marks the most negative outlook since the tracking started in April 2012.

Political turmoil, following the impeachment of South Korean President Yoon Suk Yeol after he introduced short-lived martial law on December 3, has contributed to rising uncertainty, adversely affecting consumer and business confidence.

“Downbeat expectations often stemmed from concerns surrounding domestic economic conditions, as well as potential U.S. protectionist policies,” commented Usamah Bhatti, economist at S&P Global Market Intelligence.

Last year, U.S. President-elect Donald Trump signaled significant tariffs on the U.S.’s three largest trading partners—Canada, Mexico, and China—which could impact South Korean companies operating factories in these regions.

In the latest survey, firms noted that the weakness in overseas demand from China and the United States was somewhat balanced by improvements elsewhere in Europe and parts of the Asia-Pacific region.

The trade-reliant South Korean economy saw minimal growth in the third quarter amidst declining exports. Furthermore, the central bank forecasts a slowdown in export growth to 1.5% in 2025, down from 6.3% in 2024.