Real gross domestic product (GDP) fell 0.3% in the fourth quarter last year, the Bank of Korea said on the 22nd. The decline was the largest since the fourth quarter of 2024. In the fourth quarter last year, a surge in the exchange rate created a favorable environment for exports. It was also when stock prices broke through 4,000 points for the first time ever. Then why did GDP post the biggest drop in three years?
◇ Exchange rate rose but exports fell 2.1%… overall GDP down by 1 percentage point
According to the "advance estimate of real gross domestic product for the fourth quarter and year 2025" the Bank of Korea released that day, exports were the factor that pulled down real GDP the most in the fourth quarter last year. By institutional sector, exports (1 percentage point) accounted for the largest share of the GDP decline. Some other institutional sectors increased, resulting in an overall 0.3% drop in GDP.
Generally, when the exchange rate rises, the price competitiveness of export corporations improves and exports increase. The won-dollar rate surged from the 1,390-won range at the end of the third quarter last year to the 1,480-won range at the end of the fourth quarter, creating a favorable environment for exports. However, exports in the fourth quarter last year fell 2.1% from the previous quarter.
Lee Dong-won, Director General of the Bank of Korea's Economic Statistics Department 1, said, "Semiconductor exports were very solid in the fourth quarter, but a considerable portion was due to price increases." Because real GDP is calculated after removing the impact of price increases, not all of it was reflected as export growth.
The United States' reciprocal tariff also weighed on exports. The Director General said, "Automakers, in response to the tariff, expanded local production in the United States, reducing the volume exported from Korea to the U.S.," adding, "For machinery and equipment, another major export item, demand in the United States, the largest importer, slowed due to the tariff's impact, leading to a decline in exports."
◇ Even if stock prices reflecting inflation rise, they do not align with real GDP movements
Stock prices are not a coincident index with GDP. The stock market tends to price in not only corporations' current earnings but also future economic outlook, expected revenue, and policy changes. As a result, an increase in stock prices in a given quarter may not lead to an increase in real GDP.
Also, like the exchange rate, stock prices are indicators in which inflation is reflected, so they inherently cannot align with movements in real GDP, which is calculated after stripping out inflation. Lee Dong-won, a Bank of Korea (BOK) Director General, said, "Stocks are a nominal indicator, so they do not move in the same direction as real GDP."
Nominal GDP in the fourth quarter last year is estimated at around 3%. Since adding the inflation rate to real GDP yields nominal GDP, nominal GDP increases when prices rise. In the fourth quarter last year, the consumer price index rose 0.1% and export prices rose 3%, respectively.
◇ BOK: "Consumption, exports, and government spending are expected to increase this year… positive for growth"
For the full year last year, Korea's real GDP rose 1% from a year earlier. However, it was the lowest growth rate since 2020 (-0.7%).
The Bank of Korea expects the Korean economy to improve this year compared with last year. Lee Dong-won, a Bank of Korea (BOK) Director General, said, "In the short term, the pillars supporting our economy are private consumption and exports, and both indicators are expected to increase this year," adding, "The government budget is also up 3.4% from the previous year, which will be positive for growth."
He added, "Construction investment, which unusually constrained growth significantly last year, is expected to see a slower pace of decline on an annual basis this year," noting, "This year's social overhead capital (SOC) budget increased by 1.7 trillion won from last year, and investments related to artificial intelligence (AI), including semiconductor plants, are expanding, so the construction slump will ease."