South Korea’s economy entered a rare downturn in the first quarter of 2025, with gross domestic product slipping 0.1% year-on-year—its first annual contraction since late 2020. The outcome marked a stark reversal from the 1.2% growth recorded in the closing quarter of 2024 and fell short of the 0.1% expansion forecast by economists.

On a seasonally adjusted basis, output shrank 0.2% compared to the previous quarter, reversing the modest 0.1% gain seen in Q4. The data underscore the sudden loss of momentum in Asia’s fourth-largest economy, which has largely relied on stable growth for four consecutive years.

Growth Streak Ends as Output Contracts

The unexpected downturn punctures a four-year run of uninterrupted growth, highlighting the fragility of South Korea’s expansion amid global headwinds. Annualized, the 0.1% decline marks the first negative print since the pandemic shock in late 2020, signaling that recovery from COVID-related disruptions has lost steam.

Economists point to the abruptness of the slowdown: after a strong finish to 2024, business and consumer confidence showed signs of cracking, leaving little cushion against emerging economic pressures. The steep swing from modest growth to outright contraction emphasizes the risks of overreliance on volatile external demand.

A collapse in construction activity was the single largest drag on growth, with the sector plunging 12.4% year-on-year. Developers have scaled back projects amid a property market cooldown and delays in government-backed infrastructure plans, leaving cranes idle in major urban centers.

The construction slump ripples through related industries: equipment manufacturers report order cancellations, cement producers face excess inventories, and construction services firms have trimmed headcounts. The sector’s dramatic fall has eroded a longstanding engine of job creation and investment.

Exports Falter Under Trade Barriers

South Korea’s goods exports fell by more than 1% in the first quarter, reflecting weak global demand and trade frictions. Preliminary figures for April showed overall outbound shipments down 5.2%, while U.S.-bound exports plunged 14.3% under the weight of 25% steel and auto tariffs.

As an export-driven economy, South Korea is acutely sensitive to external tariffs and decelerating global growth. Slower shipments of automobiles, machinery and petrochemicals translated directly into lost output, compounding the drag from domestic sectors already on the back foot.

Private consumption edged down 0.1%, a sign that surging living costs have weighed on consumer wallets. Retail sales growth has stalled, with households retrenching on nonessential purchases amid muted income gains and simmering uncertainty about job security.

Business investment also contracted, with capital spending falling over 2%. Companies have delayed factory upgrades and software rollouts as order books softened and political ambiguities cloud the policy outlook. The pullback in corporate outlays underscores a broader retrenchment in private-sector activity.

BoK Poised to Ease as Growth Flags

The Bank of Korea maintained its benchmark interest rate at 2.75% in April but issued a warning that 2025 growth would undershoot its previous 1.5% forecast. Officials signaled readiness to cut rates if data continue to disappoint, recognizing the need to reinvigorate domestic demand.

Market consensus has coalesced around a 25-basis-point rate cut to 2.50% in May and further easing by the third quarter. Policymakers face the delicate task of bolstering growth without stoking import-driven inflation, a balancing act made more complex by a weakening currency.

South Korea’s first quarter was marked by high political drama: impeachment trials of former President Yoon Suk Yeol and the reinstatement of Acting President Han Duck-soo weighed heavily on business confidence. Delays in policy decisions left firms in limbo over regulatory and fiscal measures.

With a presidential election set for June 3, candidates are under pressure to unveil ambitious stimulus plans. Yet partisan gridlock risks shelving any new fiscal packages until after the vote, potentially depriving the economy of timely support and extending the period of policy indecision.

Public Works as Economic Safety Net

To offset private-sector weakness, authorities may accelerate public investment in infrastructure and expand housing subsidies. Targeted spending on roads, rail and renewable-energy projects could provide a near-term boost to construction activity and support related industries.

However, budgetary limits and a rising debt-to-GDP ratio will constrain the scale of any stimulus. Policymakers must strike a careful balance between shoring up demand today and preserving fiscal sustainability for the long run, lest borrowing costs spiral higher.

Credit-watchers have taken note of South Korea’s faltering growth and political volatility. Fitch Ratings revised its 2025 forecast for the country’s GDP from 1.3% to 1.0%, flagging geopolitical tensions and domestic uncertainty as key risks.

Any further downgrades would raise borrowing costs for both the sovereign and corporate sectors, complicating debt servicing in an environment of subpar growth. Higher yields could also limit the government’s ability to fund new stimulus measures without exacerbating fiscal imbalances.

Won Weakness Tests Financial Resilience

The South Korean won has weakened against the dollar, reflecting export softness and diverging monetary paths between the Bank of Korea and other major central banks. A fragile currency risks feeding into import-led inflation, further straining household budgets.

Foreign portfolio investors, increasingly wary of sluggish growth, may shift out of South Korean equities and bonds. Sustained capital outflows could test the resilience of domestic financial markets, prompting authorities to consider measures to stabilize the won and stem potential volatility.

(Adapted from CNBC.com)

Categories: Economy & Finance, Strategy