Korea’s economy appears to be booking a 'lost five years'

Home > Opinion > Columns

Korea’s economy appears to be booking a 'lost five years'

Published: 30 Dec. 2025, 00:01

Audio report: written by reporters, read by AI

Koh Hyun-kohn

The author is the executive editor at the JoongAng Ilbo.

Watching the Ministry of Economy and Finance brief the president recently, it was difficult to suppress a sense of unease. The government set its 2026 economic growth target at 1.8 percent and appeared notably encouraged. It even declared the coming year “the first year of a great leap forward for the Korean economy.” Yet 1.8 percent is still growth in the 1 percent range. Calling that a great leap is awkward at best.

Deputy Prime Minister and Finance Minister Koo Yun-cheol, far right, speaks during a meeting of the industrial competitiveness committee and growth strategy task force at the government complex in Sejong on Dec. 16. [NEWS1]

It might have been better to be candid: that growth in the 1 percent range is unavoidable next year, that the government will work harder and that the public’s trust and support are needed. As the economy has grown larger and demographic shifts driven by low birthrates and rapid aging have taken hold, the high growth rates of the past are no longer realistic. Even so, growth of around 3 percent is needed to generate jobs, stabilize consumption and investment and sustain a virtuous cycle. At 1.8 percent, that threshold is simply not met.

President Lee Jae Myung delivers opening remarks during a briefing on the National Growth Fund at Mapo District, western Seoul, on Sept. 10. [PRESIDENTIAL OFFICE]

Korea is not accustomed to prolonged low growth. Since the Park Chung Hee(1917-1979) era, growth below 1 percent has occurred only four times: in 1980, when the second oil shock and a military coup threw the country into turmoil; in 1998 during the Asian financial crisis; in 2009 following the global financial crisis; and in 2020 amid the Covid-19 pandemic. Each episode was triggered by an extraordinary shock that inflicted severe damage. Each time, the economy rebounded with remarkable resilience, springing back the following year. After the foreign exchange crisis, growth reached 11.6 percent in 1999. In 2021, the economy bounced back 4.6 percent as it absorbed the pandemic shock.

Warning signs began to emerge in 2023. There was no singular crisis, yet growth stalled at 1.6 percent. The global aftereffects of the massive pandemic stimulus were weighing on economies worldwide, and inflation surged as supply chains were disrupted by the Russia-Ukraine war. Still, conditions were not severe enough to justify growth sinking into the 1 percent range. The United States grew by 2.9 percent that year, well above Korea’s pace.

There was no base effect. Growth barely reached 2 percent in 2024. It is projected to fall to 1 percent in 2025 and 1.8 percent in 2026. The Bank of Korea forecasts just 1.9 percent growth even in 2027. That would trap the economy in a five-year tunnel of 1 percent-range growth from 2023 through 2027. Some warn that a crisis may be approaching. It would not be an exaggeration to say the crisis has already begun. Like Japan’s “lost decade” and later “lost 30 years,” Korea appears to be booking something it has never experienced before: a lost five years.

Given the gravity of the situation, the government’s response lacks urgency. Ideas are scarce. Short-term palliative measures dominate, centered on cash handouts and local vouchers. This has long been a staple of progressive administrations. National governance increasingly resembles an expanded version of municipal administration. One of the first actions taken by the Lee Jae Myung administration was a universal cash payment.

Economic research institutes estimate that the 13 trillion won in consumption coupons issued this year lifted growth by about 0.1 percentage point. The effect was real but far too small to catalyze recovery. It also burdens public finances and remains a stopgap. If the economy struggles again next year, talk of a supplementary budget will resurface. With local elections scheduled for June, the Democratic Party is unlikely to stay on the sidelines. Taxpayer money will almost certainly be spent as if it were free.

As liquidity continues to flood the market, the problem is not a shortage of money but where it goes. Regrettably, it flows not into the real economy but into stocks and real estate. The government boasts that the KOSPI is approaching 5,000, yet stock prices are not the only things rising. Housing prices are climbing, and inflation is stirring. Those without homes or access to stock investment suffer the most. This helps explain why inequality has often worsened under progressive governments that claim to champion the vulnerable.

When the exchange rate became an issue, the government argued that the won weakened because of heavy overseas investment. It is questionable whether blaming individual investors, the National Pension Service or corporations makes sense. The fundamental cause of the weak won lies in excessive liquidity and deteriorating economic fundamentals in Korea.

Job seekers are seen filling out application forms at a job fair held at Bexco in Busan on Oct. 27. [SONG BONG-GEUN]

Redirecting liquidity toward the real economy is crucial. That requires easing regulations that block investment. Despite much talk, little has been done. Startup workers are willing to work through the night when needed, yet their most urgent request remains unmet: greater flexibility in the 52-hour workweek. Without addressing that, pledges to foster 10,000 AI deep-tech startups ring hollow. Over the past four years, the number of technology startups has actually fallen by 14,000.

As the AI era unfolds, government ministries eagerly attach “AI” to policy initiatives and organizational names. Yet it remains unclear how AI ambitions can be realized while scaling back nuclear power. In proclaiming pragmatism, politics and economics have become entangled, and direction has been lost.

The government cites rising stock prices and the conclusion of U.S. tariff negotiations as economic achievements. Stock markets remain inherently fragile without support from the real economy. The tariff deal has been portrayed as a triumph, but in reality, it leaves Korea with the burden of sending more than $20 billion a year to the United States. That is the reality and the limit of Korea’s leverage. With long-term stagnation setting in, it is hard to understand where such confidence comes from.

This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.