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South Korea GDP unexpectedly contracts, reinforcing rate cut chances
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A man runs with a trolley at the Dongmyo Flea Market in Seoul on April 15, 2025. (AFP/Anthony Wallace )
S
outh Korea's economy unexpectedly contracted in the first quarter as exports and consumption stalled amid fears over the impact of Washington's aggressive tariffs, fanning expectations of more interest rate cuts.
Gross domestic product (GDP) contracted 0.2 percent from a quarter earlier on a seasonally adjusted basis, shrinking for the first time since the second quarter of 2024 and missing forecasts for a gain of 0.1 percent in a Reuters survey.
The weak data will increase calls for the Bank of Korea to cut interest rates again as soon as next month as policymakers worry about the consequences of Trump's tariff policies, which some analysts fear may tip one of the world's most trade-reliant economies into a downward spiral.
"Industrial output all across was sluggish in the first quarter along with consumption, and exports began to be a drag on growth amid external uncertainties," said Huh Jae-hywan, an analyst at Eugene Investment & Securities, who correctly foresaw the economy would contract 0.2 percent in the first quarter.
The BOK last week signalled it would cut rates in May and left the door wide open to further monetary easing to cope with "significant" risks to the economy from US President Donald Trump's sweeping tariff policy.
It held the benchmark interest rate at 2.75 percent as expected on April 17 following three reductions since its rate-cutting cycle began in October.
Analysts see policy interest rates reaching 2.25 percent by the end of the third quarter this year as shifting US tariff policies fuel fears of a global recession and threaten to sharply curtail exports out of Asia's fourth-largest economy.
A breakdown of Thursday's data showed construction investment dropped 3.2 percent from the preceding quarter, while capital investment and exports declined 2.1 percent and 1.1 percent, respectively.
Private consumption declined 0.1 percent in the January-March period after gaining 0.2 percent three months earlier.
South Korea recently suffered its worst wildfires on record and has faced domestic political turmoil, which the BOK says hurt sentiment among consumers and businesses.
"Investment sentiment among corporations deteriorated in recent months and many were hesitant to make new investments," a BOK official said after Thursday's data was released.
"We are more positive about the second quarter as some sluggishness in investment may ease, although it's difficult to expect rapid recovery from the construction sector."
Preliminary April trade data showed exports declined 5.2 percent for the first 20 days of the month, underscoring the risks to the export-driven economy from Trump's protectionist policies.
Outbound shipments to the US dropped 14.3 percent from a year earlier, as Trump imposed a 25 percent tariff on auto imports and a 10 percent levy on all other shipments earlier this month.
The country's finance and trade chiefs are visiting Washington D.C. this week to meet their US counterparts as South Korea seeks to cut tariffs.
On an annual basis, the economy contracted 0.1 percent, also weaker than an expansion of 0.1 percent seen in the poll and down sharply after growing 1.2 percent in the previous quarter.
In 2024, Asia's fourth-largest economy grew 2 percent, after expanding 1.4 percent in 2023, according to the BOK.
