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Recent data reveals that South Korea’s economy has shown signs of decline, with the country’s gross domestic product (GDP) contracting by 0.1% year-on-year in the first quarter of 2025. This marks the first economic contraction since late 2020. According to preliminary figures, this contraction falls short of the 0.1% growth anticipated in a Reuters survey and contrasts sharply with a 1.2% increase recorded in the previous quarter.
Detailed reports from the Bank of Korea indicate that the primary driver of this downturn is a significant downturn in the construction sector, which shrank by 12.4% compared to the same period last year. On a quarterly basis, the GDP experienced a slight decrease of 0.2%, reversing a modest growth of 0.1% observed in the last quarter of 2024.
In its recent monetary policy report, the Bank of Korea cautioned that the nation’s growth outlook for 2025 is anticipated to fall below its earlier estimate of 1.5%. During its meeting in April, the central bank maintained its key interest rate at 2.75%, underscoring a cautious approach amid the deteriorating economic landscape.
The central bank noted that domestic economic performance had not met expectations, attributing the slowdown to weakening domestic demand and exports exacerbated by ongoing political uncertainties and adverse trade conditions. Jeff Ng, the Head of Asia Macro Strategy at Sumitomo Mitsui Banking Corporation, observed this economic slowdown and suggested the likelihood of further interest rate reductions by the Bank of Korea, with a possible cut as early as May.
April was marked by significant political upheaval in South Korea, notably the impeachment proceedings involving former president Yoon Suk Yeol and prime minister Han Duck-soo. The Constitutional Court reinstated Han as acting president following his impeachment in March, while Yoon was removed from office on April 4. This political instability is likely to have contributed to the economic uncertainty leading up to elections scheduled for June 3, where a new president will be chosen.
South Korea’s export-driven economy faces additional challenges due to ongoing trade tensions. While U.S. President Donald Trump had intermittently suspended his blanket “reciprocal tariffs” on certain goods, South Korea remains subject to a 25% tariff on steel and automobiles, key exports to the U.S. Notably, Hyundai and Kia rank among the top eight best-selling automotive brands in America, and the nation is the fourth largest steel exporter to the U.S.
Currently, as South Korea’s economic outlook unfolds, a delegation is traveling to the U.S. for trade negotiations. Acting President Han has expressed optimism about the upcoming discussions, indicating hopes for a beneficial resolution. The Ministry of Trade, Industry, and Energy in South Korea has revealed that the agenda for these trade talks is still in the coordination phase and has yet to be finalized.
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