The South Korean economy contracted in the first quarter, reflecting its struggle to rebound from sluggish consumption affected by political turmoil and poor export performance stemming from weak demand. Preliminary gross domestic product data from the Bank of Korea released showed that the economy shrank 0.2 percent in the January-March period from the previous quarter, which was 0.4 percentage point lower than the central bank's earlier forecast in February of 0.2 percent growth. Compared to a year earlier, it contracted by 0.1 percent. This marks the first GDP contraction since a 0.2 percent decline in the second quarter of last year and the first year-on-year contraction since the fourth quarter of 2020, when the COVID-19 pandemic disrupted the global economy. The weaker-than-expected GDP figure increases the likelihood that Asia’s fourth-largest economy will fall short of the central bank’s full-year GDP growth forecast of 1.5 percent for 2025 and that the BOK will resume its easing cycle. The BOK’s latest report comes as the country’s top economic and trade policymakers visit Washington to negotiate with their US counterparts, aiming to mitigate the impact of industry-specific tariffs and country-specific "reciprocal" duties imposed on a Korean economy that is heavily reliant on semiconductor and automobile exports. By sector, private consumption fell by 0.1 percent on-quarter, primarily due to weak spending in services such as entertainment and healthcare. Government consumption also declined by 0.1 percent, driven by reduced expenditures on health insurance benefits. Construction investment experienced a substantial decrease of 3.2 percent, largely in the construction of buildings, marking the sharpest decline since the third quarter of 2021. Equipment investment, meanwhile, contracted by 2.1 percent, mainly in machinery such as chipmaking equipment. Exports decreased by 1.1 percent, impacted by weak demand for chemical products, machinery and equipment. Imports also fell by 2.0 percent, primarily on declines in energy-related goods such as crude oil and natural gas. The BOK acknowledged significant uncertainty regarding this year's growth trajectory but anticipates a recovery in domestic demand in the second quarter, which could lead to an increase in the growth rate. The easing of some domestic political uncertainties and the impact of a 0.75 percentage point cut in the benchmark interest rate since October of last year are expected to contribute to this rebound. However, the BOK has indicated that the economic growth rate for the second quarter may fall short of its forecast of 0.8 percent. While domestic demand is expected to recover compared to the first quarter, it is not projected to be sufficient to offset the deterioration in exports. Despite a cautiously positive outlook for the next quarter, global institutions are increasingly downgrading their projections for the Korean economy this year. JP Morgan lowered its 2025 growth forecast for Korea from 0.7 percent to 0.5 percent. "Real exports are expected to continue contracting quarterly in the second quarter, with a mixed outlook between possible front-loading demand ahead of reciprocal tariffs and a slowdown in overall demand growth from trading partners," JP Morgan economist said. The International Monetary Fund has revised its growth forecast down from 2.0 percent to 1.0 percent, while the Asian Development Bank has also lowered its projection to 1.5 percent. The contraction in the first quarter reinforces the rationale for the Bank of Korea to consider a cut in the benchmark interest rate in May to stimulate domestic consumption. "In our view, recent risks to both economic growth and inflation could raise the odds for a larger cut of 50 basis points at the May meeting. However, the BOK may deliver a 25 basis point rate cut given its concerns about risks to financial stability," Citi economist said. The central bank maintained its base rate at 2.75 percent during its April meeting, following a cut of 25 basis points in February aimed at stabilizing the currency. “I really hope that this trade tension will dissipate because it’s bad for everybody.”   (ICE SEOUL)

Fonte notizia: The Korea Herald