South Korea's economy shrinks; net exports and domestic housing demand in focus

The Bank of Korea announced on Thursday that the country's GDP contracted by 0.3% in the three months ending in December compared to the prior quarter. According to projections, the GDP will grow by 1% overall in 2025.

A widespread decline in demand caused South Korea's economy to contract in the last quarter of 2025, highlighting the difficulty facing policymakers whose options for boosting growth are limited by a shaky victory and growing financial dangers.

According to the data, the factors that drove growth earlier in the year—recovering consumption, net exports, and expansionary fiscal policy—seem to be waning as authorities attempt to control risks associated with an ongoing rally in the property market, growing household debt, and a stubbornly weak won.

After rising 2.1% in the three months ending in September, net exports decreased 2.1% from the prior quarter. The won's decline over the time may have exaggerated the import expenses in the total, and the quarterly result most likely demonstrated the consequences of converting the statistics to real amounts.

Housing continues to be a major fault line at home. According to the Korea Real Estate Board, flat prices in Seoul continued to rise for the 50th week in a row as of January 12, rejecting repeated attempts by the government to temper the market.

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Because of the rise, policymakers are reluctant to loosen regulations for fear that doing so will increase household debt levels and increase the likelihood of financial instability.

As fiscal stimulus wears off, consumption has declined, while the recent period's decline was overstated by the preceding period's impressive outcomes. After a 1.3% increase in the previous quarter, private consumption growth dropped to 0.3% over the preceding three months, while government spending rose by a meagre 0.6%. Investments in facilities and construction fell by 1.8% and 3.9%, respectively.

Despite a slowdown towards the end of the year, exports helped South Korea's external balance for the majority of the previous year. The nation recorded a current-account surplus of almost $118 billion last year thanks to improved trade conditions brought about by declining energy costs and rising semiconductor prices. By 2026, the government anticipates that the surplus to reach $135 billion.

According to a person familiar with the situation, Seoul has already hinted that it may postpone keeping its promise to spend up to $20 billion in the US this year due to pressure on its currency.

Signs of K-shaped growth are also becoming more pronounced due to the uneven recovery, with semiconductor-related export-orientated industries continuing to outperform small businesses while construction and interest-rate-sensitive consumers find it difficult to regain traction. Concerns that headline growth numbers can mask more significant structural imbalances have increased as a result of the trend.

In the financial markets, this disparity is becoming more apparent. Following a 76% increase in 2025, South Korea's benchmark Kospi index has increased in nearly every session thus far this year.