GDP records sharpest contraction since Q4 2022 in the first quarter

GDP reading: The economy contracted 0.2% on a seasonally adjusted quarter-on-quarter basis in the first quarter, contrasting the fourth quarter's 0.1% increase and marking the worst result since Q4 2022. Q1’s reading was below market expectations for a slight expansion. On an annual basis, economic activity dropped 0.1% in Q1, contrasting the previous quarter's 1.2% expansion and marking the largest contraction since Q4 2020. The economy was weighed on by political turmoil in the wake of the brief martial law declaration in December, wildfires in the south of the country, and ongoing weakness in the housing market.

Broad-based downturn: The downturn was broad-based across expenditure components, with private consumption, public spending, fixed investment and exports all deteriorating. Household spending contracted 0.1% in Q1 (Q4 2024: +0.2% s.a. qoq). Public spending dropped 0.1% (Q4 2024: +0.7% s.a. qoq). Meanwhile, fixed investment fell at a sharper pace of 2.0% in Q1, following the 1.6% decrease in the prior quarter. Exports of goods and services plunged at the steepest rate in over two years, falling 1.1% in the first quarter (Q4 2024: +0.8% s.a. qoq). In addition, imports of goods and services contracted 2.0% in Q1 (Q4 2024: +0.1% s.a. qoq).

Economy to recover ahead: Our Consensus is for growth to return in Q2 thanks to recovery from the wildfires and as the political cloud over the economy lifts somewhat given the constitutional court has now confirmed the president’s impeachment. However, U.S. tariff policy will remain a major risk.

Panelist insight: On the outlook, Nomura analysts said: “Higher tariffs and structural weakness in the domestic economy are likely to remain a large drag on economic growth throughout this year and beyond. Indeed, although the US has signaled an easing of tariff policies, including a likely exemption of auto parts, we believe increased tariffs will continue to weigh on exports in H2 and beyond.” On tariffs, ING’s Min Joo Kang said: “With regard to the tariff negotiations, we're cautious about reaching an agreement in the short term. This is highly uncertain as the US position on certain sectors has changed rapidly on several occasions. In addition, as the Japan-US talks showed, negotiations are linked to defence policy, on area in which it's taking longer than expected to find a middle ground. Moreover, with a new administration likely to take office in early June, it is questionable how much bargaining power the current government will be able to exert.”

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