South Korea’s October economic data revealed a triple blow, with production, consumption, and investment all declining month-on-month. Production and consumption fell simultaneously for two straight months, marking the first such decline in four years and seven months since the early stages of the COVID-19 pandemic in February and March 2020. Retail sales dropped 0.8% year-on-year last month, extending their decline to eight consecutive months since March. Such a prolonged slump in retail sales was last seen during the 2008-2009 global financial crisis, 15 years and six months ago.
Weak domestic demand, coupled with a downturn in the construction sector, is slowing down the economy further. Construction performance has fallen for six straight months since May, the first on record since recordkeeping began in 1997. Construction output has also been shrinking for six consecutive months, the most prolonged downturn since 2000. New construction orders, which had previously shown year-on-year growth, fell sharply by 11.9% last month. While public sector orders rose by 77%, private sector orders plummeted by 30%, reflecting the limits of fiscal measures to boost the construction industry.
The only bright spot in the sluggish economy was the manufacturing sector, bolstered by semiconductor demand. The semiconductor production index reached an all-time high in October.
The Bank of Korea unexpectedly lowered the benchmark interest rate by 25 basis points to 3.0% on Nov. 28, surprising the market with the first back-to-back rate cut since 2009. The move underscores growing concerns about an economic slowdown. The central bank also revised the economic growth forecast for next year downward to 1.9%, with 2026 growth projected to drop further to 1.8%. This signals that South Korea is no longer facing a temporary slump but is sliding into a long-term low-growth phase, with growth falling below its potential rate of 2%.
The BOK’s pessimistic outlook for the next two years stems from uncertainties expected to arise after Donald Trump’s second administration takes office in January. If China retaliates against Trump’s new tariff measures, Korea’s export-dependent economy will likely face significant challenges. The Korean economy, driven almost entirely by export giants, including chipmakers, may struggle as changes to trade dynamics weigh on exports, prolonging the period of sub-2% growth.
The government and the central bank must mobilize all available resources to prevent the economy’s growth from falling into this low-growth tunnel. Delays could lead Korea down the same path as Japan’s 30-year-long economic stagnation.
