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South Korea’s Surprise Contraction Points to Broad Fragility - BLOOMBERG
(Bloomberg) -- South Korea’s economy shrank in the final quarter of 2025 due to a broad pullback in demand, underscoring the challenge for authorities whose policy options to stimulate growth are constrained by a wobbly won and mounting financial risks.
Gross domestic product contracted 0.3% in the three months through December from the previous quarter, the Bank of Korea said Thursday. That marked a sharp slowdown from the revised 1.3% growth in the prior quarter and missed the median estimate for a 0.2% expansion in a Bloomberg survey. For 2025 as a whole, the economy expanded 1%, in line with estimates.
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The figures highlight the uneven recovery as export-oriented sectors tied to chips continue to outperform small businesses. It’s an effect visible in financial markets, where the benchmark Kospi index has risen in almost every session so far this year. The data aren’t likely to prompt action from the BOK, which shifted its policy stance to neutral just last week, and likewise don’t point to major implications for the global economy.
Still, the report indicates the forces that propelled growth earlier in the year — expansionary fiscal policy, net exports and recovering consumption — may be starting to fade somewhat. That will add to the challenges as authorities seek to manage risks tied to a persistent housing market rally, rising household debt and a persistently weak won.
The third-quarter gain of 1.3% from the previous period was faster than official estimates of the economy’s potential growth rate, making a pullback at the end of the year all but inevitable. Also, the impact of some data may have been amplified in the process of compiling the report.
“The fourth-quarter contraction has not derailed overall growth, and the policy backdrop points toward a cautious central bank,” said Dave Chia, an economist at Moody’s Analytics“With pressure from a weaker won in focus, rate cuts in early 2026 appear unlikely; easing now could worsen currency depreciation, heighten financial stability risks, and revive inflation pressures.”
Net exports fell 2.1% from the previous quarter, reversing from a 2.1% advance in the three months through September. The quarterly result probably showed the effects of adjusting the data to real figures, and the won’s slide through the period may have inflated the costs of imports in the tally.
