South Korea’s quarterly GDP contracts for the first time in four years as construction activity plunges

A view of commercial and residential buildings from the rooftop of the Lotte Corp. World Tower in Seoul, South Korea, at sunset on Tuesday, November 28, 2023.

South Korea’s GDP fell by 0.1% year on year in the first quarter, based on preliminary figures, marking the first decline in its economy since the fourth quarter of 2020. The GDP figure was below the 0.1% increase expected by a Reuters poll and contrasts with the 1.2% growth in the previous quarter. Data from the Bank of Korea indicated that the decrease was mainly due to a 12.4% contraction in the construction sector compared to the previous year. Quarter on quarter, GDP decreased by 0.2%, reversing the 0.1% growth in the last quarter of 2024.

In its monetary policy statement on April 17, the Bank of Korea cautioned that South Korea’s GDP growth for 2025 is anticipated to drop below its February forecast of 1.5%. The central bank kept rates unchanged at 2.75% during the April meeting. The BOK highlighted that domestic economic expansion was weaker than anticipated, affected by sluggish domestic demand and exports due to prolonged political uncertainties and worsened trade conditions. Jeff Ng, Head of Asia Macro Strategy at Sumitomo Mitsui Banking Corporation, had predicted this downturn in an April 17 note, suggesting that there could be further rate cuts by the BOK in the upcoming months, with the next expected cut in May.

The first quarter in South Korea was marked by political uncertainty, with the impeachment proceedings of former president Yoon Suk Yeol and prime minister Han Duck-soo lingering. The Constitutional Court overturned Han’s impeachment in March, reinstating him as acting president, but subsequently removed Yoon from office on April 4. South Korea is set to hold elections on June 3 to elect a new president.

The country’s export-driven economy has also been impacted by the trade war turmoil. Although U.S. President Donald Trump temporarily halted his blanket “reciprocal tariffs” on April 9, South Korea still faces a 25% tariff on steel and automobiles, key exports to the U.S. Hyundai and Kia from South Korea are among the top eight best-selling brands in the U.S., and the country is the fourth largest steel exporter to the U.S.

As South Korean officials head to the U.S. for trade discussions, acting president Han expressed optimism that talks with the U.S. could yield a mutually advantageous outcome. The South Korean Ministry of Trade, Industry, and Economy stated on Thursday that the agenda for the U.S. meeting is being coordinated and is yet to be finalized.