In the first quarter of this year, the South Korean economy experienced negative growth for the first time in three quarters. Concerns over U.S. tariff policies and domestic political uncertainty indicated that both exports and domestic demand were sluggish. The real Gross Domestic Income (GDI) also fell by 0.4% compared to the previous quarter, marking a downturn.
According to the ‘National Income (Preliminary)’ report released by the Bank of Korea on the 24th, the real Gross Domestic Product (GDP) for the first quarter of this year decreased by 0.2% compared to the previous quarter. It is the first time since the second quarter of 2024 that the GDP growth rate recorded a negative figure (-0.2%). The magnitude of the decrease is the largest since the fourth quarter of 2022 (-0.5%).
Quarterly GDP growth rates have continued to show a slowing trend from a surprising growth of 1.3% in the first quarter of last year, to -0.2% in the second quarter, 0.1% in the third quarter, 0.1% in the fourth quarter, and -0.2% in the first quarter of this year. This marks the first time that quarterly GDP has recorded below 0.1% for four consecutive quarters.
The Bank of Korea noted in the ‘Economic Situation Assessment’ report released right after the Monetary Policy Committee on the 17th that the GDP for the first quarter could experience negative growth. This was a significant downward adjustment from the GDP growth rate of 0.2% projected in the economic outlook in February. The Bank of Korea anticipated that factors such as the prolonged domestic political uncertainty, concerns over U.S. tariff policies, major wildfires, and delays in demand for high-performance semiconductors (HBM) would increase downward pressure on both domestic demand and exports.
In reality, both domestic demand and exports showed sluggish performance in the first quarter. One key component of domestic demand, private consumption, decreased by 0.1% due to poor service consumption (such as entertainment and healthcare), marking a shift to decline for the first time in three quarters since the second quarter of last year (-0.2%). Private consumption appeared to recover after consecutive increases in the third quarter (0.5%) and fourth quarter (0.2%) of last year, but it failed to maintain the upward trend.
Another component of domestic demand, construction investment and facility investment, also recorded negative growth side by side. Construction investment, centered around building construction, decreased by 3.2%, while facility investment, focusing on machinery (such as semiconductor manufacturing equipment), fell by 2.1%. Construction investment recorded negative growth for four consecutive quarters, while facility investment declined for the first time in three quarters since the second quarter of last year (-1.7%). The drop in facility investment is the largest in three and a half years since the third quarter of 2021 (-4.9%).
Exports, which had driven growth in the fourth quarter of last year, also decreased. Exports in the first quarter dropped by 1.1%, mainly in chemical products and machinery. This marked a significant reduction compared to the growth rate of 0.8% in the fourth quarter of last year. Imports, which had increased by 0.1% in the previous quarter, decreased by 2.0%, primarily due to energy items (crude oil, natural gas). The magnitude of the decrease is the largest for both exports and imports since the fourth quarter of 2022 (each -4.1%, -2.5%).
The contribution to economic growth was -0.6 percentage points for domestic demand, while net exports recorded +0.3 percentage points. In terms of domestic demand, all sectors were weak. Private consumption, government consumption, and intellectual property investment recorded 0.0 percentage points, while construction investment (-0.4 percentage points) and facility investment (-0.2 percentage points) showed negative figures. Despite the decline in exports, net exports remained positive as imports decreased by a larger margin.
In the second quarter of this year, the real Gross Domestic Income (GDI) decreased by 0.4% compared to the previous quarter, marking a significant drop from the previous quarter’s growth rate of 0.7%. The decrease is double the real GDP growth rate of 0.2%. Gross Domestic Income refers to the total income generated within a country, calculated by subtracting government subsidies from the sum of all wages, profits, and taxes.
Meanwhile, the GDP growth rate compared to the same period last year recorded -0.1%, returning to the negative. This is the first time since the fourth quarter of 2020 (-0.5%) in 17 quarters. The GDI growth rate compared to the same period last year is -0.1%, marking the largest decline in two years since the first quarter of 2023 (-1.4%).
Earlier, the Bank of Korea predicted right after the Monetary Policy Committee that “this year’s domestic growth rate will be greatly influenced by the progress of global trade negotiations, the size and timing of the supplementary budget, and the pace of recovery in economic sentiment,” adding that “the outlook for our growth rate is likely to change significantly depending on the results of negotiations between the U.S. and other countries.”