South Korea’s economy contracted unexpectedly in the first quarter of 2025, as a combination of political instability and rising global trade tensions sent shockwaves through the export-reliant nation. According to data released on Thursday by the Bank of Korea, the country’s real gross domestic product (GDP) declined by 0.1 percent compared to the same period last year, and shrank 0.2 percent from the previous quarter.
The downturn marks a sharp reversal for Asia’s fourth-largest economy, which had been showing signs of cautious recovery after a sluggish end to 2024. Economists attribute the contraction to a series of destabilizing events, including the impeachment of former President Yoon Suk Yeol and escalating trade threats from the United States.
Investor sentiment was severely impacted after Yoon’s attempt to impose martial law in December a move that was met with widespread condemnation and eventually led to his removal from office earlier this month. The political chaos, compounded by fears over new trade barriers, has weakened domestic demand and shaken confidence in South Korea’s economic stability.
Meanwhile, concerns over US President Donald Trump’s proposed 25 percent “reciprocal” tariffs on South Korean exports have added further pressure. The policy threat, aimed at addressing perceived trade imbalances, has already led to a sharp depreciation of the Korean won and significant losses on the Seoul stock exchange.
Hyosung Kwon, an economist with Bloomberg Economics, said the combination of political uncertainty and shifting US trade policy has created a perfect storm for the Korean economy. “Two developments hit confidence and the economy fallout from former President Yoon Suk Yeol’s failed martial law attempt and worries about shifts in US trade policies,” Kwon said. He added that while a modest rebound is expected in the second quarter as political tensions ease, the recovery will remain fragile due to ongoing external risks.
South Korea’s export performance has also deteriorated sharply, with figures from the Korea Customs Service showing a more than five percent decline compared to the same period last year. Nine of the country’s ten major export categories posted negative growth, with the exception of semiconductors. The steepest drop was recorded in exports to the United States, which fell by over 14 percent.
Reflecting the growing economic concerns, the International Monetary Fund this week downgraded its 2025 growth forecast for South Korea from 2.0 percent to 1.0 percent. The Bank of Korea also revised its outlook downward, with Governor Rhee Chang-yong warning that growth could fall short of the central bank’s earlier 1.5 percent projection. He cited intensifying tariff policies, persistent inflation, and a weak exchange rate as key factors weighing on economic momentum.
Speaking at a press conference, Rhee noted that political uncertainty had dragged on longer than anticipated, delaying the recovery of economic sentiment. He also pointed to large-scale wildfires that ravaged parts of southeastern South Korea in late March, further disrupting industrial activity and adding to the country’s economic strain.
Addressing lawmakers at the National Assembly, Acting President Han Duck-soo acknowledged the scale of the challenges ahead, describing current global conditions as “unprecedented.” He warned that sweeping US-led tariff policies were creating a volatile and unpredictable international trading environment, one that could pose significant risks to South Korean industries and businesses if not carefully managed.
With economic pressures mounting at home and abroad, the government faces a critical task in stabilizing the domestic political environment while navigating increasingly complex trade dynamics on the global stage.
