^{Photo: Bloomberg.com}

Growth slows sharply at year-end

South Korea’s economy lost steam in the final quarter of the year, growing at a slower-than-expected pace as weakness in construction and exports outweighed modest gains in domestic spending. According to advance estimates from the Bank of Korea, gross domestic product expanded 1.5% year on year in the October to December period, missing economists’ expectations of 1.9% and easing from 1.8% growth in the previous quarter.

On a quarter-on-quarter basis, GDP contracted 0.3%, marking the sharpest sequential decline since the fourth quarter of 2022. Markets had anticipated a small expansion of around 0.1%, making the contraction an unwelcome surprise for policymakers and investors alike.

Annual growth at post-pandemic low

For the full year, South Korea’s economy grew just 1%, its weakest annual performance since 2020, when output contracted 0.7% during the height of the pandemic. The slowdown reflects a combination of cyclical pressures and structural challenges facing Asia’s fourth-largest economy, which remains heavily dependent on exports and capital investment.

Construction and investment weigh heavily

Construction investment emerged as one of the biggest drags on growth. Spending in the sector fell 3.9% from the previous quarter, with declines seen across both building construction and civil engineering projects. The downturn reflects tighter financing conditions, slower property activity, and delayed infrastructure spending.

Facilities investment also declined, falling 1.8% quarter on quarter, driven largely by reduced spending on transportation equipment. The pullback in capital expenditure highlights ongoing caution among businesses amid global uncertainty and volatile trade conditions.

Exports retreat despite strong annual performance

Exports fell 2.1% from the previous quarter, reversing earlier gains as shipments of motor vehicles and machinery weakened. Manufacturing output declined 1.5%, while utilities supply showed an even sharper drop, with electricity, gas, and water output falling 9.2%.

Despite the quarterly setback, exports held up relatively well over the full year. South Korea’s overseas shipments reached a record $709.7 billion in 2025, up 3.8% from the previous year. The standout performer was the semiconductor sector, where exports surged 22% on strong global demand for artificial intelligence and high-performance computing chips.

Consumption and government spending offer limited support

Domestic demand provided some cushion against the broader slowdown. Private consumption edged up 0.3% in the fourth quarter, supported mainly by increased spending on services. Government consumption rose 0.6%, driven by higher healthcare and social welfare expenditures.

However, these gains were not enough to offset the sharp declines in construction and exports, leaving overall growth in negative territory on a quarterly basis.

Trade tensions continue to cloud outlook

Trade policy uncertainty remains a key risk for South Korea’s export-driven economy. In November, President Lee Jae Myung and U.S. President Donald Trump reached a trade agreement that included $150 billion in South Korean investment in the U.S. shipbuilding sector, along with an additional $200 billion in broader investment pledges.

In return, the U.S. agreed to cut tariffs on South Korean cars and auto parts to 15% from 25%, offering some relief to automakers. However, fresh concerns have emerged after the Trump administration imposed a 25% tariff on certain imported AI chips as part of efforts to boost domestic semiconductor production.

U.S. Commerce Secretary Howard Lutnick has also warned that South Korean and Taiwanese chipmakers could face tariffs of up to 100% unless they significantly expand manufacturing capacity in the United States. President Lee has sought to downplay the threat, arguing that higher tariffs would ultimately be passed on to American consumers.

Inflation stable, but currency under pressure

Inflationary pressures have remained contained, with consumer prices rising 2.1% last year, down from 2.3% in 2024 and broadly in line with the central bank’s 2% target. This has given policymakers some room to focus on financial stability rather than aggressive tightening.

Last week, the Bank of Korea kept its benchmark interest rate unchanged at 2.5%, citing concerns over a sharply weakening currency and accelerating capital outflows. The South Korean won has fallen more than 6% against the U.S. dollar since July last year and is hovering near 16-year lows.

So far this year, the won has lost nearly 2% against the dollar, making it one of the weakest-performing currencies in Asia. Authorities have introduced measures such as waiving the foreign-exchange stability levy for banks to boost dollar liquidity, but these steps have yet to reverse the currency’s slide.

Cautious optimism for the year ahead

Despite the challenging backdrop, officials remain cautiously optimistic about the medium-term outlook. The Ministry of Economy and Finance recently raised its 2026 GDP growth forecast to 2%, up from a previous projection of 1.8%, citing expectations of a recovery in global demand and continued strength in high-tech exports.

For now, however, the fourth-quarter data underscores the fragile state of South Korea’s recovery, with growth increasingly vulnerable to swings in global trade, investment cycles, and currency markets.

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