The tariffs have not yet taken effect, but the South Korean economy has unexpectedly contracted

South Korea's economy unexpectedly contracted in the first quarter of 2025. Before the implementation of Trump's "reciprocal tariffs," political turmoil and natural disasters had already severely impacted consumer confidence and business activities in the country. In the coming period, this export-oriented economy will face even more severe prospects under the shadow of a global trade war.

Preliminary data released by the Bank of Korea on Thursday showed that in the first quarter of 2025, South Korea's Gross Domestic Product (GDP) shrank by 0.1% year-on-year, falling short of market expectations for no change, while the previous quarter saw a growth of 1.2%. Quarter-on-quarter, the South Korean economy contracted by 0.2%, also below market expectations for a growth of 0.1%, while the previous quarter had a growth of 0.1%.

Specifically, private consumption, government spending, facility investment, and exports all declined compared to the previous quarter, while construction investment fell for the fourth consecutive quarter.

In March, forest fires in the southeastern region of South Korea lasted for several weeks, resulting in dozens of deaths, tens of thousands displaced, and severe property damage, further undermining consumer confidence already affected by political chaos triggered by the presidential impeachment.

As an export-oriented economy, exports account for nearly half of South Korea's GDP growth. Data released on Thursday showed that a decrease in exports of chemical products, machinery, and equipment led to an overall decline in exports in the first quarter. Under the shadow of Trump's tariffs, South Korea's exports in the second quarter faced a "black opening". Earlier data from the General Administration of Customs showed that in the first 20 days of April (adjusted for working days), South Korea's exports fell by 5.2% year-on-year, with exports to both the United States and China declining year-on-year.

Considering the adverse factors brought by Trump's tariffs, the International Monetary Fund (IMF) on Tuesday lowered South Korea's economic growth forecast from a previous 2.0% to a significant 1.0%. In February, South Korea's national research institute had already downgraded its growth forecast. Institutions such as JP Morgan and Citigroup have also revised their growth predictions downward. The Bank of Korea indicated that it would further lower its GDP growth forecast for 2025 in May, having already reduced it from 1.9% to 1.5% in February.

This month, the South Korean government formulated an additional budget exceeding expectations, amounting to approximately 12 trillion won, to support the economy and respond to disaster relief after the forest fires. Some analysts expect the government may further increase fiscal stimulus measures in the future. Additionally, analysts anticipate that the Bank of Korea may resume interest rate cuts in May to support economic growth.

Under the threat of Trump's tariff policies, South Korea's vulnerability as an export-oriented economy has been further amplified, especially in light of political turmoil and natural disasters. Will the deterioration of the global trade environment become the last straw that breaks the camel's back for the South Korean economy?