The uncertainty surrounding tariffs in the United States and domestic political instability are pulling the South Korean economy into a quagmire. In the first quarter, the real gross domestic product (GDP) fell at the largest rate in two years, shifting to negative territory after three quarters. With both exports and domestic demand, the two pillars supporting the economy, deteriorating, achieving a growth rate in the 1% range this year has become difficult.
According to the 'National Income (Preliminary)' announced by the Bank of Korea on the 24th, the real GDP for the first quarter decreased by 0.2% compared to the previous quarter. This marks the first time since the second quarter of last year (-0.2%) that the GDP growth rate has recorded a negative (-). The decline is the largest since the fourth quarter of 2022, when company bond instability expanded due to the bankruptcy of Legoland (-0.5%). The quarterly growth rate has recorded below 0.1% for four consecutive quarters from the second quarter of last year to the first quarter of this year, a first since the commencement of statistics.
◇ “The second quarter growth rate is a 'shock'... effectively zero growth for a year”
The market is accepting this first-quarter performance as a 'growth rate shock' because it significantly undershot the Bank of Korea's growth forecast of 0.2%. Jo Yong-gu, a researcher at Shinyoung Securities, noted, “We expected -0.1%, but it was worse than expected,” adding, “Considering that the growth rate has been slowing since the first quarter of last year (+1.3%), it amounts to effectively a year of zero (0%) growth.”
Moon Hong-cheol, a researcher at DB Financial Investment, stated, “We need to take very seriously the fact that the first quarter GDP recorded a negative even before the tariff war started.” He added, “I think it's effectively at a recession level.” Generally, if the economic growth rate records negative figures for two consecutive quarters, it is defined as a recession, indicating that the current economic situation has deteriorated to a level close to a recession.
The cause of the growth rate shock can be found in domestic demand. In the first quarter, private consumption decreased by 0.1% due to sluggish service consumption (entertainment, culture, medical, etc.), and government consumption, which had been increasing for six consecutive quarters, also turned to a decrease of 0.1% as health insurance expenditure fell. Construction investment (-3.2%) and facility investment (-2.1%) also declined. Construction investment has decreased for four consecutive quarters, and facility investment experienced negative growth for the first time in three quarters.
However, the other pillar of GDP, net exports (exports - imports), had a positive impact on the economy. Both exports and imports decreased, but imports fell by a larger margin. In the first quarter, exports decreased by 1.1% and imports by 2.0%. Exports fell mainly in chemicals and machinery/equipment, whereas imports focused on energy products (crude oil, natural gas) decreased.
This trend is also reflected in the contribution of each item to growth. In the fourth quarter of last year, domestic demand lowered GDP growth by 0.2 percentage points (p), while net exports increased it by 0.3 p. In the first quarter, the contribution of domestic demand worsened to -0.6 p. Breaking it down, construction investment accounted for -0.4 p and facility investment -0.2 p. Compared to the previous quarter, construction investment improved by 0.2 p while facility investment worsened by -0.3 p. In contrast, the contribution of net exports remained stable.
◇ Possibility of annual growth rate dropping to the low 1% range... “uncertainty in outlook is growing”
The problem is that the future economic situation does not look good either. The United States has imposed a universal tariff of 10% on all trading partners and a reciprocal tariff of up to 245% on China. It has also warned of high tariffs on countries other than China, leading to an expansion of global trade uncertainty. This could even undermine net exports, which had at least contributed to economic growth.
The recent sharp decline in exports supports these concerns. According to the Korea Customs Service, from the 1st to the 20th of this month, exports amounted to $33.9 billion, down 5.2% ($1.87 billion) from the same period last year. Exports to the United States plummeted by 14.3%, while exports to China also decreased by 3.4%. By item, all major items showed a decrease in exports except for semiconductors (+10.7%).
The market is also lowering growth rate forecasts. Jo Yong-gu remarked, “I initially projected this year's growth rate to be 1.1%, but I am considering adjusting it to 1.0%,” adding, “The supplementary budget execution will be no earlier than June, and further measures to boost the economy are likely to come after the presidential election, suggesting that the trajectory for the first half will be worse than expected.” Moon Hong-cheol also noted, “I think we may need to lower the annual growth rate forecast to the low 1% range.”
The Bank of Korea is also reporting that uncertainty in outlook has increased. Lee Dong-won, head of the Economic Statistics Division at the Bank of Korea, stated, “Recently, uncertainties in domestic politics have been alleviated, and the effects of the 75 basis point (1 basis point = 0.01 percentage points) decrease in the base rate since October of last year will likely appear, suggesting a possibility of returning to positive growth in the second quarter.” However, he added, “It is very difficult to forecast future economic trends as we do not know how tariff policies will move.”
The Bank of Korea plans to present revised economic forecasts at the Monetary Policy Committee meeting scheduled for the 29th of next month. In its revised economic forecast from February, it had projected a growth rate of 1.5% for this year, but it is expected to significantly lower that in reflection of domestic and foreign conditions. The International Monetary Fund (IMF) previously lowered its growth forecast for South Korea from 2.0% to 1.0%.