Economy unexpectedly slips into contraction in Q4

Q4’s reading surprises markets on the downside: Korea's GDP declined 0.3% in seasonally adjusted quarter-on-quarter terms in Q4, following a 1.3% expansion in the previous quarter. Q4's reading was the weakest since Q4 2022 and defied market estimates of a mild expansion. On a year-on-year basis, economic growth increased 1.5% in Q4, following a 1.8% rise in the prior quarter. In 2025 as a whole, the economy expanded 1.0% (2024: +2.0%), marking the weakest result in the post-pandemic era.

Fixed investment and exports drive downside surprise: Relative to the previous period's data, readings in Q4 softened for private consumption (+0.3% in seasonally adjusted quarter-on-quarter terms vs +1.3% in Q3), government spending (+0.6% vs +1.3% in Q3), fixed investment (-2.4% vs +1.4% in Q3), exports of goods and services (-2.1% vs +2.1% in Q3) and imports of goods and services (-1.7% vs +2.0% in Q3). As anticipated, the fading effect of government stimulus measures weighed on consumption. The real downside surprise came from a marked deterioration in readings for fixed investment and exports. Fixed investment growth lost momentum, as construction activity cooled amid the ongoing property market adjustment, and exports shrank under the combined pressure of tariffs and tepid global demand, hitting auto and machinery exports in particular.

GDP to rebound in Q1: Our Consensus is for GDP growth to rebound in sequential terms at the outset of 2026; past monetary easing and stronger-than-expected chip demand will likely boost fixed investment and exports. Moreover, improving consumer sentiment and the strong performance of domestic equities are set to underpin household spending. A weaker-than-expected won is a downside risk.

Panelist insight: Commenting on the outlook, Nomura’s Jeong Woo Park stated: “We maintain our above-consensus 2026 GDP growth forecast […]. Our optimism is also backed by a likely pick up in construction, led by base effect-driven improvements and higher fiscal spending on social infrastructure, including data centers and energy highways, although a genuine recovery in construction activity will likely require further progress on PF [project-financing] resolution and a stabilization of property prices, in our view.”

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