South Korea’s economy contracted by 0.2% in the first quarter of 2025, according to preliminary data from the Bank of Korea (BOK) released on June 5, 2025.

This marks the first negative growth in nine months and is attributed to domestic political unrest and trade uncertainties related to US tariff policies.

The country’s real gross domestic product (GDP) declined from the previous quarter, following a 0.1% growth in the last two quarters of 2024. This comes after a 1.3% expansion in the first quarter of 2024.

During the January-March period, exports fell by 0.6% due to reduced shipments of chemicals, machinery, and equipment.

Facility investment declined by 0.4%, the weakest performance since early 2024. Additionally, construction investment dropped by 3.1%, while private spending decreased by 0.1%, indicating weaker demand for services.

The contraction coincided with domestic political turmoil following former President Yoon Suk Yeol’s declaration of martial law in December 2024. This situation affected consumer and business confidence.

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🔗 Source: The Korea Times

🧠 Food for thought

1️⃣ Korea’s crisis resilience follows historical pattern of economic recovery

South Korea has demonstrated remarkable economic resilience throughout multiple crises, suggesting potential for recovery from the current contraction.

During the 1997 Asian Financial Crisis, South Korea’s economy contracted dramatically, with GDP shrinking by 33.1% in 1998, yet by 1999 had already begun a strong recovery and returned to pre-crisis growth levels by 20011.

This recovery was fueled by substantial reforms, including restructuring the banking sector and improving corporate governance, particularly in the chaebols (large family-owned conglomerates)2.

The current 0.2% contraction is far less severe than previous crises, suggesting that if political stability can be restored, Korea has demonstrated capacity to implement effective recovery strategies.

South Korea’s fundamental economic strength remains intact, evidenced by its impressive long-term trajectory from a GNI per capita of just $67 in 1953 to $32,115 in 20193.

2️⃣ Political instability consistently impacts Korea’s economic performance

The current contraction attributed to martial law and political chaos mirrors previous periods when leadership crises directly affected economic outcomes.

During Park Geun-hye’s presidency, which ended in impeachment, Korea’s economy grew at just 2.9% on average—the lowest rate for any president—highlighting how political turmoil typically correlates with economic underperformance4.

Korea’s political landscape has become increasingly polarized since its transition to democracy in 1987, with progressive and conservative forces creating an environment where political crises more directly impact economic stability5.

The imposition of martial law represents an extreme form of political instability that predictably dampened consumer confidence, as evidenced by the 0.1% drop in private spending noted in the current economic data.

This pattern suggests that resolving the current political situation will be a prerequisite for economic recovery, particularly for restoring domestic consumer and investor confidence.

3️⃣ Export-dependent economies face disproportionate risks from tariff threats

South Korea’s vulnerability to US tariff threats stems from its economic structure, which relies heavily on exports for growth and prosperity.

The country transformed from minimal exports of just $32.82 million in 1960 to a major global exporter with $542.2 billion in 2019, making trade disruptions particularly damaging to its economic model3.

Economic analyses suggest that a 10% universal tariff could reduce global GDP by approximately 1%, with export-dependent economies like South Korea likely to feel these effects more severely than countries with larger domestic markets6.

The uncertainty surrounding tariff policies typically causes businesses to delay investments, consistent with the reported 0.4% drop in facility investment during the first quarter.

Beyond immediate economic impacts, tariffs create disruptions in global supply chains that are particularly harmful to manufacturing-intensive economies like South Korea, potentially explaining the 0.6% decline in exports noted in the article7.

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