South Korea’s Economy Contracts in Late 2025 but AI and Chip Boom Signal Brighter Outlook
South Korea’s economy unexpectedly shrank in the final quarter of 2025, marking its steepest decline in three years, as weak investment and sluggish exports weighed on growth. However, analysts believe a strong rebound driven by the global AI and chip boom and robust semiconductor demand will stabilise the outlook in 2026.
Sharp Contraction Follows Earlier Surge
Gross domestic product (GDP) fell 0.3% in the October–December period compared with the previous quarter, according to advance estimates from the Bank of Korea (BOK) released on Thursday. Economists polled by Reuters had expected a 0.1% rise. The decline followed a 1.3% surge in the third quarter, the fastest in nearly four years, fuelled by stimulus measures from President Lee Jae Myung’s administration.
“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. He noted that the outlook for 2026 remains positive, underpinned by continued strength in South Korea’s semiconductor industry.
BOK official Lee Dong-won attributed the downturn partly to weaker-than-expected recovery in construction investment, adding that upcoming infrastructure projects and increased corporate spending on AI and semiconductor facilities should bolster investment this year.
Semiconductor Sector Powers Market Optimism
Despite the GDP setback, investor sentiment remained upbeat. South Korea’s benchmark stock index exceeded 5,000 points for the first time on Thursday morning, driven by gains in chipmakers such as Samsung Electronics and SK Hynix. President Lee had set this milestone as an early target after taking office just over six months ago.
Construction investment plunged 3.9% in the fourth quarter, while facility investment declined 1.8%. Private consumption rose slightly by 0.3% after a stronger 1.3% expansion in the previous quarter, aided by a supplementary government budget. Exports dropped 2.1%, hurt by declines in autos and machinery despite a recently finalised tariff deal with the United States. Imports fell 1.7%, contributing a net negative 0.2 percentage points to growth.
Central Bank Maintains Steady Rates Amid Currency Risks
For all of 2025, the economy expanded by just 1.0%, the slowest annual pace since 2020, following 2.0% growth in 2024. The BOK projects growth of 1.8% in 2026, while the government forecasts a slightly higher 2.0%.
The central bank last week maintained its policy rate, signalling an end to its easing cycle and prioritising currency stability. “With pressure from a weaker won in focus, rate cuts in early 2026 appear unlikely,” said Chia. “Easing now could worsen currency depreciation, heighten financial stability risks, and revive inflation pressures.”
On an annual basis, GDP expanded 1.5% in the fourth quarter, below economists’ expectations of 1.9% and slower than the 1.8% increase recorded in the third quarter.
“Growth last year was supported mainly by strong semiconductor exports,” said Park Sang-hyun, economist at iM Securities. “This year will likely be better overall, but outside the chip sector, domestic demand remains subdued.”
with inputs from Reuters
