Korean economy shrinks again in Q1

Korea Herald

24-04-2025

BOK suggests Q2 growth rate may miss expected 0.8 percent
The South Korean economy contracted in the first quarter, reflecting its struggle to rebound from sluggish consumption affected by political turmoil and poor export performance stemming from weak demand.
Preliminary gross domestic product data from the Bank of Korea released on Thursday showed that the economy shrank 0.2 percent in the January-March from the previous quarter, which was 0.4 percentage point lower than the central bank's earlier forecast in February of 0.2 percent growth. Compared to a year earlier, it contracted by 0.1 percent.
This marks the first GDP contraction since a 0.2 percent decline in the second quarter of last year and the first year-on-year contraction since the fourth quarter of 2020, when the COVID-19 pandemic disrupted the global economy.
"The prolonged uncertainty in domestic politics and shifts in US tariff policies have exacerbated uncertainties in the trade environment, delaying the recovery of consumer and investment sentiment,' Lee Dong-won, head of the economic statistics department at the Bank of Korea, said in a press briefing.
The weaker-than-expected GDP figure increases the likelihood that Asia's fourth-largest economy will fall short of the central bank's full-year GDP growth forecast of 1.5 percent for 2025 and that the BOK will resume its easing cycle.
The BOK's latest report comes as the country's top economic and trade policymakers visit Washington to negotiate with their US counterparts, aiming to mitigate the impact of industry-specific tariffs and country-specific "reciprocal" duties imposed on a Korean economy that is heavily reliant on semiconductor and automobile exports.
Lee said the negative effects of unpredictable US tariff measures have yet to be reflected in the export figures.
The first quarter was lackluster in terms of domestic demand, which contributes nearly half of all economic growth, and exports, which represent one-third of the country's GDP.
By sector, private consumption fell by 0.1 percent on-quarter, primarily due to weak spending in services such as entertainment and healthcare. Government consumption also declined by 0.1 percent, driven by reduced expenditures on health insurance benefits.
Construction investment experienced a substantial decrease of 3.2 percent, largely in the construction of buildings, marking the sharpest decline since the third quarter of 2021.
Equipment investment, meanwhile, contracted by 2.1 percent, mainly in machinery such as chipmaking equipment.
Exports decreased by 1.1 percent, impacted by weak demand for chemical products, machinery and equipment. Imports also fell by 2.0 percent, primarily on declines in energy-related goods such as crude oil and natural gas.
The BOK acknowledged significant uncertainty regarding this year's growth trajectory but anticipates a recovery in domestic demand in the second quarter, which could lead to an increase in the growth rate.
The easing of some domestic political uncertainties and the impact of a 0.75 percentage point cut in the benchmark interest rate since October of last year are expected to contribute to this rebound.
However, the BOK has indicated that the economic growth rate for the second quarter may fall short of its forecast of 0.8 percent. While domestic demand is expected to recover compared to the first quarter, it is not projected to be sufficient to offset the deterioration in exports.
Government spending related to the upcoming presidential election and proactive fiscal measures are viewed as positive drivers for second quarter growth.
"Economic sentiment is likely to improve in the second quarter compared to the first. With budget allocations tied to the June election, there is potential for increased spending, particularly among non-profit organizations,' Lee said.
The government has submitted a supplementary budget proposal worth 12 trillion won ($8.4 billion) to the National Assembly.
Despite a cautiously positive outlook for the next quarter, global institutions are increasingly downgrading their projections for the Korean economy this year.
On Tuesday, the International Monetary Fund lowered its growth forecast for Korea from 2.0 percent to 1.0 percent. Similarly, the Organization for Economic Cooperation and Development and the Asian Development Bank also revised their forecasts down to 1.5 percent, from 2.1 percent and 2.0 percent, respectively.
BOK Gov. Rhee Chang-yong hinted at a potential reduction in the central bank's growth projection, which was set at 1.5 percent in February. 'Given recent developments in US tariff policies, the scenarios assumed during our February outlook now appear overly optimistic,' he noted following the Monetary Policy Committee meeting on April 17.
The contraction in the first quarter reinforces the rationale for the Bank of Korea to consider a cut in the benchmark interest rate in May to stimulate domestic consumption.
"In our view, recent risks to both economic growth and inflation could raise the odds for a larger cut of 50 basis points at the May meeting. However, the BOK may deliver a 25 basis point rate cut given its concerns about risks to financial stability," Citi economist Kim Jin-wook said.
The central bank maintained its base rate at 2.75 percent during its April meeting, following a cut of 25 basis points in February aimed at stabilizing the currency.
Rhee said trade tension arising globally is a 'large headwind," during an interview with CNBC released hours before the first quarter GDP data was unveiled.
'My point is that we will be affected directly by the US tariff and also indirectly in their tariffs to other countries,' he said, citing the semiconductor production in Vietnam, and car and electronics production in Canada.
'I really hope that this trade tension will dissipate because it's bad for everybody.'