Economic Expansion Misses Forecasts in Final Quarter
During the fourth quarter, South Korea’s economy grew by 1.5% year over year, which was less than expected because domestic growth slowed down. Quarterly output fell by 0.3%, the biggest drop since late 2020, as activity across the board slowed down. The quarterly drop was not what economists had expected, and it showed how weak growth conditions became toward the end of the year.
In the last quarter, growth hit 1.8%, the fastest rate in more than a year, but then it slowed down. The central bank’s data showed that the slowdown was caused by weaker trade and investment, not a sudden drop in consumption. Analysts said that the reversal made them worry about how strong the economy would be in the short term as we entered 2026.
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Construction Investment Dragged Overall Economic Performance
Investment in construction fell by 3.9% from the previous quarter because both building and civil engineering work dropped sharply. The downturn was caused by higher borrowing costs, projects being put on hold, and developers being cautious in both the residential and infrastructure sectors. During that time, economists said that construction was the biggest thing holding back quarterly growth.
Investment in facilities also fell by 1.8%, mostly because businesses spent less on transportation and industrial equipment. This pullback made it seem like businesses were putting off capital spending because of trade uncertainty and slowing global demand. The overall drop in gross domestic product was made worse by weak combined investment.
Export Pullback Hurts Manufacturing and Utilities
Shipments of cars and machinery fell sharply, which caused exports to fall by 2.1% from one quarter to the next. Output from factories fell by 1.5%, and utilities supply fell sharply because there was less demand from businesses. The drop in exports made up for the gains seen earlier in the year from strong semiconductor shipments.
Even though exports fell in the first quarter of 2025, they still reached an all-time high. Exports of semiconductors rose by 22% every year, thanks to the need for chips that work with artificial intelligence. Analysts, on the other hand, said that tariff risks could threaten this strength in the future.
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Consumption and Government Spending Offer Limited Support
Private consumption went up by 0.3%, mostly because people spent money on services instead of goods. People were still careful even though inflation pressures eased and income growth stayed low. Consumption gains weren’t enough to make up for the weakness in investment and exports as a whole.
Government spending went up by 0.6%, mostly because healthcare costs went up. Fiscal support helped stabilize things a bit, but it wasn’t big enough to really boost growth. Policymakers admitted that there wasn’t much room in the budget because of rising public obligations.
Trade Agreement With US Offers Partial Relief
In November, South Korea and the United States made a trade deal to lower tariffs on important exports. The deal included big promises from Korea to invest in US shipbuilding and industry. In exchange, the US cut its tariffs on Korean cars from 25% to 15%.
Officials said the deal helped make export expectations more stable, but it didn’t get rid of all the uncertainty. After the US took action against artificial intelligence chips, Korean manufacturers became worried again. Analysts warned that trade policy changes are always a risk.
Currency Weakness and Monetary Policy Constraints
The won has lost more than 6% of its value against the dollar since the middle of the year and is now near 16-year lows. As Korean investors put more money into US stocks, capital outflows sped up. So far, market interventions have not been able to stop the currency’s decline.
The Bank of Korea kept its benchmark rate at 2.5% to put financial stability first. Policymakers weighed the risks of currency depreciation against the need to keep inflation close to the target. External financial pressures still limit further rate cuts.
Outlook Hinges on Exports and Global Trade Conditions
The finance ministry raised its growth forecast for 2026 to 2%, saying that the economy would slowly get better. Officials said that inflation was going down and global demand might stabilize. However, the outlook is not clear because of weak construction and tariff threats.
Economists said that a long-term recovery depends on how well exports do and how stable trade relations are. The demand for semiconductors is good, but it could change because of political events. So, even though the government is optimistic, growth prospects are still cautious.
