South Korea’s economic contraction in early 2025 has raised concerns across financial and political sectors. The country’s economy shrank 0.2 percent from the previous quarter, surprising analysts and policymakers alike. Previously, the Bank of Korea forecasted a 0.2 percent growth for the same period.
Compared to last year, South Korea’s economic contraction measured 0.1 percent. This marked the first year-on-year decline since the fourth quarter of 2020. Experts believe prolonged political instability and weak global demand hurt recovery efforts.
Lee Dong-won from the Bank of Korea pointed to unpredictable US tariffs and internal political issues. He explained these factors weakened both trade and investment sentiment throughout the first quarter.
Meanwhile, private consumption dropped 0.1 percent due to low spending in entertainment and healthcare. Government consumption also fell 0.1 percent, especially in health insurance benefits.
Construction investment saw a sharp fall of 3.2 percent, mostly in building projects. Equipment investment also dropped 2.1 percent, especially in chipmaking machines. These figures indicate structural concerns within domestic industries.
Exports fell by 1.1 percent, hurt by falling demand for chemical products and machinery. Imports declined 2.0 percent, mainly in crude oil and natural gas.
However, South Korea’s economic contraction might ease in the second quarter. Government spending tied to the June election could lift domestic demand. The Bank of Korea also expects a rebound from its previous rate cuts.
Still, officials remain cautious. The central bank warned that export conditions could worsen if US tariffs increase. Global banks, including JP Morgan and the IMF, have already lowered their forecasts.
JP Morgan now projects just 0.5 percent growth for South Korea in 2025. The IMF revised its outlook to 1.0 percent. These adjustments reflect mounting pressure on Asia’s fourth-largest economy.
The Bank of Korea may cut rates again in May to stimulate growth. Some economists suggest a larger 50-basis-point cut, but stability concerns may limit the reduction to 25 points.
Governor Rhee Chang-yong emphasized the growing threat of global trade disputes. He warned that US tariffs could directly and indirectly damage Korean exports.
South Korea’s economic contraction has ignited debate on the right policy response. The next few months will prove critical for the country’s financial direction and long-term stability.
