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South Korea’s economy unexpectedly shrank by 0.2% in Q1 2025, marking its first quarterly contraction since mid-2024, as exports and consumer spending faltered amid growing uncertainty over U.S. tariff hikes. The downturn, falling short of Reuters’ forecast of a 0.1% expansion, raises expectations for the Bank of Korea (BOK) to cut interest rates again, possibly as early as May.
The central bank, which held its benchmark rate steady at 2.75% on April 17 following three cuts since October, has already signaled openness to further easing. Analysts now predict the policy rate could fall to 2.25% by Q3 as fears of a global slowdown mount, driven by U.S. President Donald Trump’s protectionist trade agenda.
Key economic components reflected the broader weakness. Construction investment tumbled 3.2%, capital investment fell 2.1%, and exports dipped 1.1% from the previous quarter. Private consumption edged down 0.1%, reversing a slight gain in Q4 2024. Early April trade data further confirmed the trend, with exports down 5.2% year-on-year and shipments to the U.S. plunging 14.3% following Trump’s tariffs on autos and other goods.
Domestic challenges added to the strain, including record wildfires and political instability, which the BOK noted have dampened business and consumer sentiment. Corporate investment appetite has waned, although central bank officials remain cautiously optimistic about a moderate recovery in Q2.
Year-on-year, South Korea’s GDP declined 0.1%, a sharp reversal from 1.2% growth in Q4 2024. The economy expanded 2.0% in 2024 and 1.4% in 2023. As Asia’s fourth-largest economy grapples with global headwinds, policymakers are under pressure to stabilize growth through monetary and diplomatic efforts, including ongoing talks in Washington to ease tariff burdens.
