(Bloomberg) -- South Korea’s economy barely managed to eke out growth last quarter following an earlier contraction, underscoring the risks from a softening export rally, broadening geopolitical tensions and a US presidential race that may impact trade-reliant nations.
Gross domestic product expanded 0.1% in the three months through September from the previous quarter, the Bank of Korea said Thursday. That figure missed economists’ forecast of a 0.4% expansion by a wide margin and came after a 0.2% contraction in the second quarter.
From a year earlier, the economy expanded 1.5%, also slower than analysts’ forecast of 2%. The BOK may downgrade its forecast for economic growth when it meets next month for a rate decision, Shin Seung Cheol, head of the research department, said in a briefing. The BOK said in August the GDP would grow 2.4% this year. The central bank began its policy pivot earlier this month with a rate cut.
South Korea is among the world’s most robust exporters, with its technology industry driving earnings from abroad. But the rally in memory-chip exports has shown signs of slowing in recent months, raising questions over the intensity of global demand related to artificial intelligence development. The limited return to overall growth could also encourage the BOK to bring forward its next rate cut move.
“It’s a dilemma, but the BOK will need to cut its rate a little more if the economic situation comes out to be worse than expected,” said Lee Seung-suk, a researcher at the Korea Economic Research Institute in Seoul. “No one knew the export momentum would sputter so early. With uncertainties rising over the US economy and war risks intensifying in the Mideast, they are unlikely to meet expectations.”
Exports in real terms fell due to a moderation in technology exports and dullness in other products, the BOK said. A decline in the shipments of automobiles and chemical products in particular led the export decline by 0.4% in the third quarter from the previous three months while imports increased by 1.5%, the BOK said.
What Bloomberg Economics Says...
“The much weaker-than-expected rebound in South Korea’s GDP in the third quarter could lead the Bank of Korea to deliver its next rate cut sooner than we have expected. Our baseline view has been that it will ease further in February. Now we think a January move is possible.”
— Hyosung Kwon, economist
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Private consumption fared better, rising 0.5%, while facility investment expanded 6.9% as spending on equipment such as chip-making machines increased, it said.
“Our economy grew modestly as domestic demand picked up as expected, but exports grew more slowly than expected,” the BOK said.
Following the release Korea Economic Research’s Lee downplayed the chance for large-scale stimulus from the government, saying it’d have little to no effect in the short term.
President Yoon Suk Yeol has so far refused to endorse extra spending to shore up economic momentum, seeking to encourage private sectors to lead growth while keeping the role of fiscal spending limited. His policy reflects concerns about national debt loads that increased during the pandemic when his predecessor, Moon Jae-in, deployed tens of trillions of won in extra budgets to shore up small businesses and consumer sentiment.
That fiscal stimulus, coupled with record-low borrowing costs, contributed to an overheating in housing markets that sapped the approval for Moon and his party, helping Yoon to win the presidential election in 2022.
The BOK defended its timing for a policy pivot when it cut its benchmark interest rate this month, saying easing earlier would have added fuel to an overheated property market in Seoul and threatened financial stability. Governor Rhee Chang-yong added the central bank considered the country’s economic growth potential and slower inflation in reaching the decision to lower the rate by a quarter-percentage point to 3.25%.
When the BOK meets next month, most economists expect a hold and will likely focus on any changes in the growth forecast to guess the timing for the next rate cut. A Bloomberg survey last week indicated economists think the monetary policy board will conduct two cuts in the first half of next year and another one in the final quarter.
Expectations of an almost year-round easing next year reflects a softening outlook for exports and economic growth.
Most South Korean businesses are concerned that trade barriers will rise in 2025 and tariffs weigh on global commerce regardless of whether Donald Trump or Kamala Harris takes power in November’s US presidential election. North Korea’s growing involvement in Russia’s war on Ukraine is also compounding geopolitical risks that weigh on global commerce.
South Korea’s trade ministry said Tuesday export growth may slow down in the October-December period compared with the previous three quarters, even though it will still stay positive.
The softening is likely due to a delay in the recovery of global manufacturing, said Hanwha Investment & Securities economist Lim Hye-youn. “US manufacturers are taking into account a consumption slowdown while it’ll take time to confirm the effectiveness of China’s stimulus,” he said.
China remains the biggest trading partner for South Korea even as Seoul’s economic ties with Washington strengthens under a security alliance that President Yoon Suk Yeol has fortified with the Biden administration.
The push back toward the US in trade relations coincides with rising competition from Chinese companies in everything from automobiles to semiconductors. South Korea last year recorded its first trade deficit with China in about three decades.
(Adds more details from release, economist comments)
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