South Korea's consumer sentiment in December saw its steepest decline in four years, weighed down by heightened economic uncertainty amid the fallout from President Yoon Suk Yeol's martial law declaration, a central bank survey showed Tuesday.

The composite consumer sentiment index fell to 88.4 in December, down 12.3 points from November's 100.7, according to a Bank of Korea survey. This marks the sharpest monthly decline since March 2020, when the index dropped 18.3 points at the start of the COVID-19 pandemic. The December reading is also the lowest since November 2022, when it stood at 86.6.

A reading above 100 indicates optimism, while a lower figure indicates pessimism compared to the long-term average (2003-2023). December’s reading marks a sharp reversal, dipping below the 100 threshold for the first time since May’s 98.4. The index had stayed above 100 in the intervening months, signaling a tentative recovery in Korea’s sluggish domestic demand.

Driving the sharp decline is the political turmoil triggered by President Yoon's brief martial law declaration on Dec. 3, which has led to an ongoing impeachment process. Consumer confidence has been further dampened by external instabilities in the global financial markets and the trade environment.

"The CSSI dropped in November due to uncertainties like the US presidential election and slowing exports, with the martial law incident further exacerbating the decline," an official from the BOK explained, adding, "The recovery in consumer sentiment will depend on how quickly the political instability is resolved."

Woo Seok-jin, an economics professor at Myongji University, said the significant contraction in consumer sentiment reflects public concern about the long-term impact of political instability on the economy.

"As uncertainty deepens, people tend to save more, further weakening consumer sentiment. Not only was the martial law declaration a shock, but the subsequent complications caused by the Cabinet and the opposition parties have intensified public anxiety. The sharp decline in sentiment suggests people have lost confidence that the chaos will be resolved soon," Woo said, adding, "Without a swift resolution, the situation could worsen the already stagnant economy, potentially leading to a deeper recession."

The martial law debacle has rattled the Korean economy, fueling market volatility and causing the local currency to slide to historic levels. The benchmark Kospi hit an annual low of 2,360 points on Dec. 9, while the won has been hovering around a 15-year high of 1,450 won to the US dollar in recent days. On Monday, the Korean won closed above 1,450 won against the greenback for the third consecutive day, marking the first such streak since March 2009, during the global financial crisis.

The public expected consumer prices to increase by 2.9 percent over the next year, amid rising foreign exchange rates and inflationary pressures from the US, according to the BOK. The gauge marked a 0.1 percentage point increase from 2.8 percent in November, reflecting a reversal in the slowdown of consumer price inflation that had been observed since May.

The won's depreciation has already started to impact the economy, driving up import prices and pushing the supply price index up by 0.6 percent, the highest increase in seven months and the second consecutive monthly rise. Producer prices, which typically lead consumer prices, reversed a four-month decline, rising 0.1 percent in November.

The political turmoil has cast a shadow over Korea’s already bleak economic outlook, with growth expected to slow further in 2025 amid weakened domestic demand and investment. On Monday, the finance minister indicated that growth could fall below 2 percent next year, in line with the Bank of Korea’s 1.9 percent projection.

Yet, professor Woo noted that inflation is unlikely to rise sharply, despite expectations of further currency depreciation, which he predicts could approach 1,500 won next year.

"Inflation is influenced by multiple factors, including the exchange rate, which is expected to weaken further, especially with Trump's return to office in January. While challenges like these could drive inflation higher, weak demand should help keep it relatively stable," the economist noted.

Woo's outlook aligns with BOK Governor Rhee Chang-yong's recent projection that the consumer price inflation rate, currently around the mid-1 percent range, will rise slightly before stabilizing near the 2 percent target.

By Choi Ji-won (jwc@heraldcorp.com)