South Korea's economy shrank in Q1, impacted by tariffs and political instability.

According to preliminary data, South Korea's GDP contracted by 0.1% year-on-year in the first quarter of 2025, significantly falling short of analysts' expectations for a 0.1% year-on-year growth. This marks the first contraction in South Korea's economy since the fourth quarter of 2020, reflecting the severe impact of domestic political turmoil and unstable foreign trade on the economy.

The South Korean economy had shown a growth trend since the fourth quarter of 2024, with a year-on-year growth of 1.2% at that time. However, the contraction in the first quarter of 2025 indicates a reversal in economic momentum, primarily dragged down by external tariff policies and an unstable domestic political environment. South Korea's economic model heavily relies on exports, particularly steel and automobile exports to the United States. Despite U.S. President Trump's announcement on April 9 to pause the full-scale "reciprocal tariffs," South Korean steel and automobile exports still face a 25% tariff, which undoubtedly has had a significant impact on South Korea's economy.

Steel and automobiles are two of South Korea's main export products to the United States, with Hyundai and Kia cars having substantial sales in the U.S. market, while South Korea is the fourth-largest steel exporter to the U.S. Despite the overall economic slowdown, data indicates that South Korea's exports in the first quarter fell by 1.1% quarter-on-quarter, and it is expected that export drag on the economy will intensify in the second quarter.

In addition to trade uncertainties, the South Korean economy has also been affected by domestic political turmoil. In March 2025, the Constitutional Court of South Korea dismissed the impeachment case against Acting President Han Duck-soo, reinstating him to office, but in April, Yoon Seok-youl was removed from office due to the martial law order incident, causing market concerns about political instability in South Korea. This political uncertainty has exerted pressure on domestic investment, with data showing that in the first quarter, construction investment declined by 3.2% from the previous quarter, and capital investment decreased by 2.1% quarter-on-quarter.

In its monetary policy statement on April 17, the Bank of Korea has already warned that South Korea's GDP growth rate in 2025 is expected to be lower than the previously forecasted 1.5%. Due to continued political uncertainty and deteriorating trade conditions, both domestic demand and exports in South Korea are showing weak performance, with economic growth significantly below expectations. With the upcoming presidential election, South Korea's economic outlook remains fraught with uncertainties.

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