South Korea’s Surprise Contraction Points to Broad Fragility

Economic Performance - South Korea's GDP contracted by 0.3% in the fourth quarter of 2025, a significant slowdown from the revised 1.3% growth in the previous quarter, missing the median estimate for a 0.2% expansion [5][6][10] - The economy expanded by 1% for the entirety of 2025, aligning with estimates [5] Trade and Exports - Net exports fell by 2.1% from the previous quarter, reversing a 2.1% advance in the three months through September, likely influenced by the won's depreciation and rising import costs [1][12] - Despite the recent contraction, nominal shipments remained strong, and the country recorded a current-account surplus of approximately $118 billion in 2025, expected to rise to $135 billion in 2026 [12][14] Consumption and Investment - Private consumption growth slowed to 0.3% from a previous 1.3% gain, while government spending increased modestly by 0.6% [9] - Construction and facilities investment saw declines of 3.9% and 1.8%, respectively, indicating a broad pullback in demand [9] Market Dynamics - The Kospi index has shown resilience, briefly crossing the 5,000 mark, reflecting strong performance in export-oriented sectors, particularly in semiconductors [6][4] - The housing market has also seen a rally, with apartment prices in Seoul rising for 50 consecutive weeks, despite government efforts to cool the market [8][14] Monetary Policy and Currency - The Bank of Korea's recent shift to a neutral policy stance suggests that rate cuts are unlikely in the near term due to concerns over currency depreciation and financial stability risks [2][11] - The won has depreciated over 8% since late June, complicating the central bank's ability to ease monetary policy [11][16] Future Outlook - The government remains optimistic, forecasting 2% growth for 2026, driven by firmer consumption and stronger exports, while also focusing on managing household debt and enhancing foreign capital attraction [17][18] - Analysts suggest that domestic demand will play a crucial role in 2026, with potential upside from fiscal policy but also downside risks from increased loan repayment burdens for households [19]