South Korea's economy shrinks for the first time since 2020

South Korea has reported a contraction in its GDP for the first quarter of 2025. The Bank of Korea's advance figures showed that the GDP fell by 0.1% year on year, marking the first decline since late 2020. This figure was lower than the 0.1% increase predicted by analysts and contrasts sharply with the 1.2% growth recorded in the final quarter of 2024. Notably, the construction sector experienced a significant downturn, contracting by 12.4% year on year, which played a crucial role in the overall economic slump. Additionally, GDP declined by 0.2% on a quarterly basis, a reversal from the previous quarter's growth of 0.1%. In its monetary policy communication, the Bank of Korea expressed concerns regarding the sluggish growth of the domestic economy, which has been exacerbated by political uncertainties and unfavorable trade conditions. As South Korea's economy is heavily reliant on exports, the ongoing trade disputes have posed significant challenges. The bank forecasted a potential decrease in GDP growth for 2025, lowering its previous estimate of 1.5%. This indicates rising concerns about economic stability moving forward. The political landscape during this period has been especially tumultuous, influenced by the impeachment trials of former President Yoon Suk Yeol and Prime Minister Han Duck-soo. While the Constitutional Court reinstated Han as acting president, the situation has created an environment of uncertainty that reflects negatively on consumer confidence and spending habits. South Korea is also facing challenges from ongoing tariffs imposed by the U.S., including a 25% tariff on steel and automobiles, which are critical exports for the nation. The tariff situation was compounded by the recent trade talks with the U.S, where South Korea’s officials sought to mitigate the impact of these measures and restore favorable trade relations. Economic analysts raised concerns over the extended impact of U.S. protectionist policies, especially as South Korea's economy appeared vulnerable to the external economic environment. The contraction in GDP signals deeper issues within the economy, which analysts like Jeff Ng from Sumitomo Mitsui Banking Corporation have anticipated, suggesting that further measures by the Bank of Korea may be necessary to address decreasing growth rates.