[Why&Next]"Crisis Becomes the New Normal" Korea's Shaken Fundamentals Draw Focus to Q1 GDP

Possibility of Negative Growth for Q1 Real GDP to Be Announced on the 24th
Four Consecutive Quarters Around 0%... An Unprecedented Situation
U.S. Tariff Shock Expected After Q2
Forecasts Project Less Than 1% Growth This Year... "Fundamental Reform Needed"

As South Korea's economic growth rate for the first quarter of this year is expected to fall short of projections, concerns are mounting over a prolonged period of low quarterly growth hovering around 0%. Expectations for this year's growth are also being further lowered. This is because it is difficult to expect domestic demand to provide support due to factors such as household debt, especially in light of the impact of U.S. tariffs expected to continue after the second quarter. With Korea's economic fundamentals remaining weak and structural improvements proving elusive, fundamental concerns about the Korean economy are growing.

On the 3rd, when U.S. President Donald Trump announced a 25% reciprocal tariff on imports from Korea, Pyeongtaek Port in Pyeongtaek City, Gyeonggi Province, was filled with containers and export cars. Photo by Yonhap News

"Possibility of Negative Growth in Q1"... Korea's Growth Rate Fails to Rebound for Fourth Consecutive Quarter

According to the Bank of Korea on the 21st, the advance estimate for South Korea's real gross domestic product (GDP) for the first quarter of this year, to be announced on the 24th, is likely to be around 0%. The Bank of Korea recently stated in its "Economic Situation Assessment (April 2025)" that the first quarter growth rate is likely to fall below the 0.2% (quarter-on-quarter) forecast made in February, and that there is a possibility of a slight negative growth. Both domestic demand and exports have slowed, as economic sentiment has weakened due to growing internal and external uncertainties, and temporary factors such as large-scale wildfires, construction delays at some sites, and deferred demand for high-bandwidth memory (HBM) have also played a role.

If first quarter GDP remains at the expected level, South Korea's quarterly growth rate will continue its low-growth streak of around 0% for the fourth consecutive quarter, following the second quarter of last year (-0.228%), the third quarter (0.1%), and the fourth quarter (0.066%). It is unprecedented for the quarterly growth rate to remain at the bottom for such an extended period without rebounding. Even during major economic crises, the downturn never lasted more than three quarters, and was followed by a significant rebound.

According to the Bank of Korea's Economic Statistics System (ECOS), South Korea experienced three consecutive quarters of deep negative growth during the foreign exchange crisis, from -0.611% in the fourth quarter of 1997 to -6.714% in the first quarter of 1998 and -0.78% in the second quarter, but then rebounded in the third quarter (1.957%), fourth quarter (2.493%), first quarter of 1999 (3.106%), and second quarter (4.338%). During the 2008 financial crisis, the country recorded -3.374% in the fourth quarter, but quickly recovered to 0.264% in the first quarter of 2009, 1.352% in the second quarter, and 3.051% in the third quarter. Even during the COVID-19 shock in 2020, the country struggled with -1.286% in the first quarter and -2.74% in the second quarter, but managed to rebound in the third quarter (2.209%).

Currently, South Korea's economic growth rate ranks among the lowest of major economies worldwide. According to the Bank of Korea, South Korea's real GDP growth rate for the fourth quarter of last year (0.066%) ranked 29th out of 37 countries surveyed. This survey included 36 member countries of the Organisation for Economic Co-operation and Development (OECD), excluding Colombia and Lithuania, plus China. South Korea has received a bottom-tier global growth report card for three consecutive quarters based on quarterly GDP figures.

Aftermath of U.S. Tariff Shock Post-Q2... More Forecasts Project 0?1% Growth for This Year

As the U.S. tariff policy this month has been implemented more strongly and broadly than expected, there is no guarantee of a recovery in the growth rate even after the first quarter of this year. The Bank of Korea expects that the tariff hikes will raise import prices in the U.S., reducing demand and leading to a decline in direct exports to the U.S. In addition, as China’s exports to the U.S. decrease due to mutual retaliatory tariffs between the U.S. and China, South Korea’s intermediate goods exports to China are also expected to decline. According to Hyundai Research Institute, the scale of South Korea’s exports to the U.S. affected by the U.S. tariff policy amounts to about 9.4% of GDP?approximately 6.8% from direct exports and about 2.5% from indirect exports. Direct exports to the U.S. increased at an average annual rate of 10.0%, from $95.9 billion in 2021 to $127.8 billion in 2024. Indirect exports to the U.S. were also estimated at about $44 billion as of 2020.

As a result, the current account surplus for this year is also expected to fall short of the Bank of Korea’s February forecast of $75 billion. While the Bank of Korea will release detailed figures in its May economic outlook, it anticipates that the goods balance will shrink due to the impact of U.S. tariffs. The services balance is also expected to see a widening deficit, as the transport surplus decreases due to reduced merchandise trade stemming from trade friction. In addition, GDP will inevitably be affected through indirect channels such as increased uncertainty in trade policy and heightened volatility in financial markets.

Lee Changyong, Governor of the Bank of Korea, commented on this year’s economic growth rate, saying, "Looking at the Trump administration’s tariff policies so far?including reciprocal tariffs, tariffs on Chinese goods, product-specific tariffs, and the 10% base tariff?the February outlook scenario was too optimistic." Based on this, the May economic outlook is expected to present a figure for this year’s growth rate that falls below the 1.4% projected in February under the pessimistic tariff scenario. There are few positive variables to be found at this point. The Bank of Korea also forecasts that the government’s supplementary budget of 12.2 trillion won will only raise this year’s GDP by 0.1 percentage point.

Lee Changyong, Governor of the Bank of Korea, is speaking at a press briefing on the monetary policy direction held after the Monetary Policy Committee decided to keep the base interest rate unchanged on the 17th. Bank of Korea

Korea’s Economic Fundamentals Shaken... Fundamental Structural Reform Needed

For these reasons, both domestic and international institutions are steadily lowering their expectations for South Korea’s economic growth rate this year. As of the 10th, the median forecast among about 40 market participants, including major investment banks, for South Korea’s growth rate this year is 1.4%. The bottom 25% value is just 1.1%. The number of institutions forecasting growth rates in the 0% range is increasing. Seven institutions?including Bloomberg Economics (0.7%), JP Morgan (0.7%), iM Securities (0.8%), ING Group (0.8%), Citigroup (0.8%), Hi Investment & Securities (0.8%), and Capital Economics (0.9%)?projected growth rates below 1%.

Experts point out that the unprecedented prolongation of quarterly growth rates hovering around 0% is not just a problem for this year’s growth outlook. Underlying the turbulence caused by the tariff shock are several factors: a decline in the productive labor force due to low birth rates and an aging population; a decrease in productivity and efficiency resulting from delayed industrial innovation. As long as these factors continue to undermine the fundamental strength of the Korean economy, it will be difficult to sustain a dramatic rebound in GDP. This is why calls for fundamental structural reform continue to be raised.

Expectations for South Korea’s potential growth rate, which reflects the true capability of the economy, are also declining. South Korea’s potential growth rate, which hovered around 5% in the early 2000s, dropped to the mid-3% range on average in the 2010s, to the mid-2% range from 2016 to 2020, and has recently fallen to 2%. The Bank of Korea warns that if the current trend continues without improvement, the potential growth rate will continue to decline: averaging 1.8% from 2025 to 2029, 1.3% from 2030 to 2034, 1.1% from 2035 to 2039, 0.7% from 2040 to 2044, and 0.6% from 2045 to 2049.