South Korea’s economy shrank in the first quarter of 2025, marking its first contraction in four years. According to the Bank of Korea, GDP fell 0.2% from the previous quarter and 0.1% year-over-year, missing expectations and signaling mounting economic pressure.
The downturn is being blamed on a combination of domestic political instability and rising global trade tensions. Former President Yoon Suk Yeol was removed from office in April, following a controversial attempt to impose martial law last December. A snap election is scheduled for June 3, leaving a temporary leadership vacuum.
Meanwhile, consumer spending dropped 0.1% amid shaken public confidence, and construction activity plunged 12.4% year-over-year. Business investment and exports also declined, with shipments to the U.S. falling sharply under newly imposed tariffs.
President Donald Trump’s administration reinstated 25% duties on South Korean steel and added steep tariffs on automobiles and parts, which make up a large share of South Korea’s exports to the U.S. A 10% blanket tariff on other imports from South Korea has also been introduced.
South Korea’s government is responding with an $8.4 billion emergency stimulus plan. However, economists say the measure may fall short as the U.S.-China trade conflict deepens and demand from both countries weakens. Exports to China were also down 3.4% in early April.
Acting President Han Duck-soo has ruled out retaliation and is pushing for “win-win” negotiations with U.S. trade officials, currently underway in Washington. The outcome could heavily influence the country’s economic path through the rest of 2025.
The Bank of Korea held interest rates steady at 2.75% but hinted at upcoming cuts to support growth. Analysts at Nomura and ANZ expect at least two more rate cuts and further fiscal stimulus in the months ahead.
The IMF has lowered South Korea’s 2025 growth forecast to just 1%, reflecting global uncertainties and internal setbacks. With major exporters like Hyundai and Kia under pressure, the country faces a tough road to recovery.
As South Korea heads into its June presidential election, policymakers will need to balance diplomacy, stimulus, and stability to steer the economy back on track.