South Korea’s economy shrinks as tariffs darken global outlook

SEOUL – South Korea’s economy contracted in the first quarter, underscoring the fragile state of business activity even before exporters absorbed the full force of US President Donald Trump’s punitive import duties, and raising fears over the potential for further damage in the region.

In one of Asia’s first gross domestic product reports for the three months ended March, South Korea’s economy shrank 0.2 per cent versus the prior quarter, according to Bank of Korea (BOK) data released on April 24, missing economists’ median forecast of 0.1 per cent growth. The economy contracted 0.1 per cent year on year, below the forecast of zero growth. 

Prolonged political uncertainties coupled with fears over Mr Trump’s tariffs sapped economic activities, a BOK official said. He added that a clearer picture of the fresh tariffs’ impact will be available by May or June, considering the time it takes for companies to sign deals and deliver shipments.  

South Korea’s disappointing numbers follow the International Monetary Fund’s

downgrade of its 2025 global growth forecast

to 2.8 per cent, down from the 3.3 per cent predicted in January. The country’s growth outlook was slashed to 1 per cent from 2 per cent projected in January. 

The World Trade Organisation also drastically revised its projections for global commerce last week, saying it now expects the volume of world merchandise trade to decline by 0.2 per cent in 2025 – almost 3 percentage points lower than it would have been without the US-led trade war. Early trade data for South Korea released this week showed

shipments to the US fell 14.3 per cent i

n the first 20 days of April.

Economists reckon Asia will likely to be the worst hit from US tariffs, which will drag down regional growth through weaker business investment and sentiment, requiring central banks to step in with looser policy settings. 

There are other indicators that are flashing warning signals for Asia. A leading index of Asia ex-Japan’s aggregate exports created by Nomura is pointing to weak Asian export growth, with economist Rob Subbaraman saying this week that there is a risk it is underestimating the weakness ahead.

“After all, the US effective tariff rate is currently at levels not seen in a century, with Asia likely to be hardest hit,” he wrote in a note, as early signals from South Korea’s first 20-day April exports suggest a “notable deceleration in Asia’s export growth is on the horizon”.

South Korea, a key US ally, was hit with a 25 per cent across-the-board tariff that has been temporarily reduced to 10 per cent for 90 days. As with other nations, it also faces a 25 per cent tariff on shipments of cars, steel and aluminium. South Korean officials are currently in Washington in an attempt to persuade the Trump administration to lower the duties.

With former president Yoon Suk Yeol now permanently removed from office, a snap presidential election on June 3 is seen as a key opportunity to restore political stability and shore up consumer and business confidence in Asia’s fourth-biggest economy. Markets are betting that a new administration will have more firepower and a clearer mandate to take effective actions to revive economic activity.

Last week, the BOK warned that the economy faced considerable downside risks from Mr Trump’s trade agenda, but a wobbly won and a surprise pickup in inflation in March helped convince the central bank to hold interest rates steady at 2.75 per cent.

Even as the BOK moved cautiously, the government announced a 12 trillion won (S$11 billion) supplementary budget plan as it seeks to spur the economy by front-loading fiscal spending. BLOOMBERG