[Q&A] Bank of Korea: "Despite Negative Growth in Q4, This Year Will Not Slow Down... Government Contribution to Rise"

Press Briefing on Real GDP for Q4 and Full Year 2025
"After a Surprise Growth in Q1 2024, Four Consecutive Quarters of Low Growth Unlikely This Year"
"Growth to Accelerate Compared to Last Year, with Constraints on Construction to Ease"

The Bank of Korea expects this year's economic growth rate to be higher than last year's. Although growth slowed more than expected in the fourth quarter of last year (-0.3%), the bank does not anticipate that negative or low growth will continue into this year. In particular, the constraints on construction investment, which dragged down last year's growth rate, are expected to ease significantly this year. With an increase in the government budget, the contribution of government investment is also projected to be higher than last year.

Dongwon Lee, Director of Economic Statistics Division 2 at the Bank of Korea (second from left), is speaking at the "Press Briefing on the Real Gross Domestic Product for the Fourth Quarter and Annual 2025" held at the Bank of Korea in Jung-gu, Seoul, on the morning of the 22nd. From left: Hyunyoung Lee, Head of the National Income Expenditure Team; Dongwon Lee, Director; Changhyun Park, Head of the National Income General Team; Yeji Lee, Manager of the National Income General Team. Courtesy of the Bank of Korea

Dongwon Lee, Director of Economic Statistics Division 2 at the Bank of Korea, made these remarks at the "Press Briefing on the Real Gross Domestic Product for the Fourth Quarter and Annual 2025" on the 22nd. South Korea's economic growth rate recorded "-0.3%" in the fourth quarter of last year, and barely reached 1.0% on an annual basis. On a quarterly basis, after a surprising 1.3% growth in the third quarter of last year, the economy shifted to negative growth in just one quarter.

Director Lee stated, "Some may wonder whether, as in the previous year, there will be little to no growth following a surprise growth in the first quarter of 2024, but we expect growth to expand this year compared to last year. In the short term, private consumption and goods exports are supporting our economy, and both are expected to continue increasing this year." He added, "The government budget is also set to increase by 3.5% this year, which is expected to further boost the government's contribution to growth. The constraints on construction, which significantly limited growth last year, are also expected to ease considerably. If construction investment returns to a neutral level, it could become a factor for even higher growth."

The following is a Q&A with Director Lee.

- Please provide the growth rates for the fourth quarter and the full year last year to the second decimal place.

▲ The quarter-on-quarter growth rate for the fourth quarter of last year was -0.28%. The annual growth rate was 0.97%.

- How did U.S. tariffs, semiconductor exports, and consumption coupons respectively affect last year's growth rate?

▲ It is difficult to separate the effects precisely, but the projection fell from 1.5% in November 2024 to 0.8% in February last year, likely due to political uncertainty and tariffs. The subsequent rise to 1.0% in November was probably influenced by policy effects, such as the impact of consumption coupons, which will be further analyzed and explained by the Research Bureau in the future.

- How much did semiconductors contribute to South Korea's economic growth rate last year?

▲ Hyunyoung Lee, Head of the National Income Expenditure Team / The contribution of semiconductor exports to last year's growth rate was 0.9 percentage points. However, that does not mean the economy would have grown only 0.1% without semiconductors. Producing semiconductors requires importing raw materials, and 40% of these are imported. If there had been no semiconductor production, there would have been no imports, and thus the offsetting effect from imports would also disappear, potentially raising the growth rate further. As the economy is organically and intricately interconnected, it is difficult to simply state that growth would have been just 0.1%.

- What were the reasons for construction investment underperforming expectations both annually and in the fourth quarter last year?

▲ Construction investment unexpectedly turned positive quarter-on-quarter in the third quarter last year. We anticipated that this momentum would continue into the fourth quarter, leading to a faster recovery, but that did not materialize. The construction sector remains challenged by persistently high construction costs. As it is difficult to generate profits, private building construction, such as redevelopment, has seen a backlog of orders, but fewer projects are breaking ground. The main reason is the high construction costs, which require construction companies to ensure profitability, leading to ongoing negotiations between ordering associations and contractors over cost increases. As a result, the pace of recovery was slower than expected.

- What is the basis for expecting an improvement in construction investment constraints this year?

▲ This year, the SOC (social overhead capital) budget increased by 1.7 trillion won compared to last year, semiconductor plants are being expanded, and AI investment is also increasing, which are all positive factors. The government plans to concentrate budget execution in the first half of the year. R&D budgets have also increased. However, even with a significant easing of sluggishness, a large positive growth is unlikely. There are structural factors and constraints due to weak real estate markets in regional areas. Rather than a large positive, we expect construction investment to approach a more neutral level.

- The contribution of exports in the fourth quarter of last year dropped by 1.0 percentage point quarter-on-quarter. When was the last time it was this low?

▲ Hyunyoung Lee / The lowest export contribution was -1.4 percentage points in the fourth quarter of 2022, and this is the lowest since then.

- If the government's contribution to growth increases this year, can it be said that the government is driving this year's growth?

▲ It is true that the government's contribution will increase due to a larger budget, but even if the annual growth rate reaches the upper 1% range, we do not believe the government will be the main driver.

- Exports recorded a negative figure in the fourth quarter of last year. Was this due to a base effect?

▲ There are three main factors for exports in the fourth quarter. First, until the fourth quarter, semiconductor exports were driven by volume, but from the fourth quarter, price increases became the main driver. In the past, semiconductor companies pursued a preemptive strategy by investing ahead of booms, but now their strategy is more synchronized with current demand, resulting in a significant supply shortage. With excess demand and insufficient supply, prices naturally surged. The shift from volume-driven to price-driven semiconductor exports, coupled with the base effect from high growth in the second and third quarters, played a role. Second, automobile exports appear to have been affected by an increased share of local production in the U.S., reducing direct exports from Korea to the U.S. Additionally, the U.S. ended electric vehicle tax credits at the end of September last year, leading to an overall decline in electric vehicle consumption. While Korean companies increased exports to Europe in the third quarter to avoid the U.S. market, competition intensified in the fourth quarter as China rapidly increased its market share. Third, the largest importer of machinery and equipment is the U.S., and due to weak demand and tariff effects in the U.S., machinery and equipment exports recorded a negative figure.

- Private consumption continued to increase in the fourth quarter of last year. How do you assess this?

▲ Private consumption increased by 0.3% quarter-on-quarter in the fourth quarter. While this was in line with expectations, the fact that it remained positive is considered a good sign.

- You mentioned that the positive growth in private consumption is a good sign, but isn't durable goods consumption still not rebounding? Is it appropriate to view this as a solid recovery?

▲ Consumption of passenger cars declined due to the exhaustion of electric vehicle subsidies. However, consumption of semi-durable and non-durable goods increased. Among goods, non-durable items such as food accounted for a large share and improved in the fourth quarter. Passenger car demand is expected to rebound this year as subsidies are reinstated, leading to deferred demand. This is not seen as a fundamental weakness. Since consumption increased in the fourth quarter despite a significant reduction in policy effects, we expect this trend to continue into the first quarter of this year.