Contracting growth in the first quarter stokes fears of stagnation

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Contracting growth in the first quarter stokes fears of stagnation

Published: 25 Apr. 2025, 00:00

Audio report: written by reporters, read by AI

Customers shop for goods at a supermarket in Seoul on April 6. [YONHAP]

Korea’s economy contracted in the first quarter of 2025, highlighting deepening concerns about long-term stagnation amid domestic political instability and external shocks. According to data released Thursday by the Bank of Korea, GDP shrank 0.2 percent compared to the previous quarter. The figure falls short of the central bank’s earlier forecast of 0.2 percent growth and marks the first negative growth in three quarters.

Underlying indicators reveal a broad-based slump. Private consumption fell 0.1 percent as political unrest, including the declaration of martial law and the impeachment of President Yoon Suk Yeol, dampened consumer sentiment. Construction investment dropped 3.2 percent and facility investment slid 2.1 percent, reflecting sluggish business activity. Exports, often a key driver of the Korean economy, declined 1.1 percent. Imports fell by an even steeper 2 percent, which mitigated the overall contraction through net exports.

More troubling than the single quarter of negative growth is the broader trend of stagnation. Since a brief spike of 1.3 percent growth in the first quarter of 2024, Korea’s economy has recorded near-zero growth for four consecutive quarters: negative 0.2 percent, 0.1 percent, 0.1 percent and negative 0.2 percent. This marks the first time since the Bank of Korea began compiling GDP data in 1960 that the quarterly growth rate has remained below 0.1 percent for an entire year. The situation is considered worse than during the 1997 Asian financial crisis or the 2008 global financial crisis.

Prospects for the second quarter are also dimming. The full impact of the U.S.-led tariff war and the recent widespread wildfires is expected to weigh further on economic activity. Achieving the government’s target of 1 percent annual growth now appears unlikely. Reflecting this concern, the International Monetary Fund (IMF) slashed Korea’s 2025 growth outlook from 2 percent to 1 percent, citing the country’s vulnerability to external shocks due to its high dependence on exports.

This economic fragility is compounded by structural challenges such as a declining birthrate and aging population, which continue to drag down Korea’s growth potential. According to IMF projections, Korea’s nominal GDP will fall from 12th to 15th in the global rankings by 2030, overtaken by Mexico, Australia and Spain. The figures reflect Korea’s slipping position between advanced economies and rapidly growing emerging markets.

Containers are stacked at a port in Pyeongtaek, Gyeonggi, on March 14. [NEWS1]

There is no silver bullet to reverse Korea’s low-growth trajectory, but urgent short- and long-term measures are needed. The upcoming Korea-U.S. “2+2” trade talks offer an opportunity to ease tariff-related shocks. At the domestic level, the National Assembly must swiftly approve the government’s proposed 12 trillion won ($83.5 billion) supplementary budget, ideally through bipartisan cooperation. If necessary, a second round of fiscal stimulus should be considered.

Over the long term, Korea must reorient its industrial strategy and reform economic structures to build new growth engines. This includes easing regulations that hinder corporate activity, expanding tax incentives and fostering a more competitive business environment. Without bold efforts to improve economic fundamentals, Korea risks being trapped in a prolonged period of stagnation.

Translated from the JoongAng Ilbo using generative AI and edited by Korea JoongAng Daily staff.