South Korean economy unexpectedly shrinks on broad weakness

SEOUL - South Korea’s economy shrank in the final quarter of 2025 due to a broad pullback in demand, underscoring the challenge for the authorities, whose policy options to stimulate growth are constrained by a wobbly won and mounting financial risks.

Gross domestic product contracted 0.3 per cent in the three months through December from the previous quarter, the Bank of Korea (BOK) said on Jan 22.

That marked a sharp slowdown from the revised 1.3 per cent growth in the prior quarter and missed the median estimate for a 0.2 per cent expansion in a Bloomberg survey.

For 2025 as a whole, growth was 1 per cent, the slowest since 2020 when the economy shrank following the outbreak of Covid-19.

The data suggests that the forces that propelled growth earlier in 2025 – expansionary fiscal policy, net exports and recovering consumption – have faded somewhat as the authorities seek to manage risks tied to a persistent housing market rally, rising household debt and a persistently weak won.

Asia’s fourth-largest economy has struggled with sluggish demand, a troubled housing market and the fallout of former president Yoon Suk Yeol’s martial law declaration, which plunged the country into political chaos.

Net exports in the fourth quarter of 2025 fell 2.1 per cent from the previous quarter, reversing from a 2.1 per cent advance in the three months through September. The quarterly result probably showed the effects of adjusting the data to real figures, and the won’s slide through the period may have inflated the costs of imports in the tally.

Still, the figures also highlight the uneven recovery, reflecting signs of K-shaped growth as export-oriented sectors tied to semiconductors continue to outperform small business as construction and interest-rate-sensitive households struggle to regain footing.

The trend has raised concerns that headline growth figures may obscure deeper structural imbalances.

That divergence is increasingly visible in financial markets. South Korea’s benchmark Kospi index has risen in almost every session so far in 2026, after surging 76 per cent in 2025, and briefly crossed the long-symbolic 5,000 level on Jan 22 – a milestone long championed by President Lee Jae Myung.

During his presidential campaign, Mr Lee pledged to roughly double the Kospi’s level, framing capital-market reform as central to revitalising growth.

The stock market rally has been mirrored by the housing market, especially in the high-end neighborhoods of the capital.

Apartment prices in Seoul extended gains for a 50th straight week as at Jan 12, according to the Korea Real Estate Board, defying repeated government efforts to cool the market.

The rally has kept policymakers wary of easing policy settings out of concern doing so might spur household debt levels and raise the risk of financial instability.

The won has fallen more than 8 per cent since late June due to capital outflows, global interest rate differentials and uncertainty over trade policy. Officials have warned that further depreciation could exacerbate financial instability and fuel inflation.

Seoul has already signaled it may hold off on fulfilling a vow to invest as much as US$20 billion (S$25.69 billion) in the US in 2026 given the pressure on its currency, according to a person familiar with the matter.

Beneath the equity rally, gains remain concentrated in a narrow set of stocks led by chip giants Samsung Electronics and SK Hynix. Exports show a similar pattern, with semiconductor shipments rising about 22 per cent while most other sectors, including autos and steel, lagged.

That concentration heightens South Korea’s exposure to shifts in US trade and industrial policy aimed squarely at the chip industry.

US Commerce Secretary Howard Lutnick warned that South Korean and Taiwanese memory chip producers could face tariffs of up to 100 per cent unless they commit to expanding manufacturing on American soil.

The White House has said President Donald Trump may announce new tariffs and an accompanying offset programme to create an incentive for domestic manufacturing in the near future.

The government remains more optimistic, forecasting 2 per cent growth in 2026 on firmer consumption and stronger exports.

Officials have pledged to maintain tight oversight of household debt, consider creating a dedicated real estate supervisory body, and fully extend onshore foreign exchange trading to a 24-hour system as part of broader efforts to attract foreign capital and boost productivity.

For now, South Korea enters the new year with growth intact but increasingly fragile, buoyed by chip exports and asset markets, yet constrained by currency weakness, policy limitations and rising trade policy risks abroad, leaving few easy levers should momentum falter further. BLOOMBERG