South Korea’s three main growth engines—consumer spending, investment and exports—have all stumbled. According to the Bank of Korea, the country’s gross domestic product shrank by 0.2% in the first quarter of 2025 compared to the previous quarter.
What’s striking is that this downturn came even before the full impact of U.S. tariffs, pushed by President Donald Trump, began to materialize. Both domestic demand and exports collapsed.
After contracting by 0.2% in the second quarter of last year, the economy barely eked out growth in the third and fourth quarters—just 0.1% each—before slipping back into negative territory.
Quarterly growth of S. Korea has now remained at or below 0.1% for four consecutive quarters, a level of stagnation unseen even during past crises such as the 1997 Asian financial meltdown (Asian Contagion), the 2008 global financial crisis, or the COVID-19 pandemic in 2020. In those earlier downturns, the economy at least managed to rebound by the fourth quarter.
But the country’s economic foundations have weakened. Persistently sluggish domestic demand—driven by low birthrates and an aging population—along with eroding growth potential, have left the economy more fragile. The situation has been further worsened by a string of shocks, including martial law, a passenger plane disaster, and large-scale wildfires.
Consumer activity, which had sharply contracted after martial law was declared, failed to recover in the first quarter.
Similarly, private consumption fell by 0.1% from the previous quarter, dragged down by sluggish spending in service sectors like entertainment and healthcare.
Construction investment shrank by 3.2%, while facility investment dropped by 2.1%. The latter marked the sharpest quarterly decline in three and a half years, since a 4.9% drop in the third quarter of 2021. Exports of S. Korea also declined by 1.1% as shipments of chemicals and machinery components weakened.
What is concerning is that the outlook for the second quarter offers no certainty of improvement, since the tariff war has yet to fully take effect.
On the issue, Bank of Korea Gov. Rhee Chang-yong told CNBC that mounting trade tensions were acting as a headwind for the Korean economy, adding that downside risks to growth were increasing. He likened the current situation to entering a dark tunnel.
The biggest drag on first-quarter growth came from construction investment, which has now declined for four consecutive quarters. The 3.2% drop in the first quarter alone shaved 0.4 percentage points off GDP.
Construction accounts for roughly 15% of S. Korea’s GDP, and its slump has spilled over into related industries such as steel, cement, moving services, interior design, and food businesses.
Also, the downturn in construction employment could further accelerate the slowdown in domestic demand. Many construction workers are hired on a day-to-day basis, making them especially vulnerable when activity slows.
In March, the number of people employed in the construction sector stood at 1.93 million—down 185,000 from a year earlier. It was the 11th consecutive month of job losses in the sector.
At a labor market near Namguro Station in Seoul on Apr. 24, a staffing agency official said, “Last year, people wouldn’t take a job unless it paid at least 200,000 won ($140) a day. Now, they’re willing to work for anything in the $70 range without a word of complaint.”
“We used to hear people say, ‘The economy might pick up next year.’ But since last year, no one talks like that anymore,” he added.
A restaurant owner nearby added, “Workers used to come in for drinks after their shift. These days, not even half of them show up.”
Business sentiment, already mired in pessimism, continues to show little sign of improvemen
The Bank of Korea’s Business Survey Index for April came in at 87.9, well below the baseline of 100 that separates optimism from pessimism. Business sentiment has remained in this pessimistic zone since Oct. 2022, when the index dropped to 98.6, and it has failed to recover above 100 in the 31 months since.
A bank official in the Sihwa National Industrial Complex said, “These days, when we visit our clients in the complex, we often find their factory doors closed and no signs of activity inside. Because conditions are so difficult, companies have become extremely sensitive to interest payments, and even loan sales have become a struggle.”
Even exports—long seen as a key pillar of S. Korea’s economy—failed to prop up growth in the first quarter.
Overheating issues discovered in Nvidia’s AI accelerators led to delays in shipments of the latest chips, which in turn caused high-end semiconductor orders to fall short of expectations. For companies heavily reliant on the U.S. market, the pressure is intensifying. Also, For companies heavily reliant on the U.S. market, the pressure is intensifying.
“Take Korean GM, for example,” said an official at the Incheon Chamber of Commerce. “Nearly 90% of its vehicle exports go to the U.S. Some of its suppliers are now wondering out loud what happens if that plant shuts down.”
It’s also rare for government consumption to decline during a downturn. Typically, when household and corporate spending falters, the government steps in with fiscal spending to stimulate the economy, but in the first quarter, even government consumption fell by 0.1% quarter-on-quarter.
It marked the first time since record-keeping began in the second quarter of 1960 that all five key components—private consumption, construction and facility investment, exports, and government spending—fell simultaneously from the previous quarter.
Despite the S. Korean government’s pledge to accelerate fiscal spending in response to martial law and to stimulate domestic demand, it failed to stop the downturn. First-quarter combined spending by the government, public institutions and private sector rose by $2.92 billion from a year earlier, but the impact fell short.
A Bank of Korea official noted that part of the decline in government consumption stemmed from reduced health insurance payments. After an outbreak of whooping cough among children and teenagers subsided earlier this year, healthcare-related disbursements under the national insurance program declined.
The 0.2% contraction in the first quarter was 0.4 percentage points below the Bank of Korea’s February forecast of 0.2% growth. Economists now expect that annual growth for 2025 will fall far short of the bank’s full-year projection of 1.5%.
Woo Seok-jin, a professor at Myongji University, noted that the International Monetary Fund recently lowered China’s 2025 growth forecast by 0.6 percentage points in response to 145% U.S. tariffs, but cut S. Korea’s forecast by a full percentage point.
“That says a lot,” he said. “The economy is essentially in free fall now. The government needs to mobilize every available resource.”
