Korea's economy posts surprise 1% growth in Q3 propelled by semiconductor exports

Korea's economy grew a stronger-than-expected 1 percent in the third quarter, fueled by robust semiconductor exports and investment. This has put the nation’s annual growth on track to exceed the Bank of Korea's (BOK) forecast of 3.3 percent despite sluggish private consumption.

The figures were released Tuesday in the BOK's advance estimate of real GDP for the July-to-September period.

The result marked a surprise expansion of more than triple the central bank's August forecast of 0.3 percent.  

Exports rose 2.3 percent from the previous quarter, led by semiconductors, contributing 1.1 percentage points to overall GDP growth. The BOK estimated that semiconductors accounted for roughly half the economy's growth in the third quarter. 

Domestic demand also contributed 0.9 percentage points to growth. Facilities investment, such as spending on equipment like semiconductor manufacturing machinery, increased 4.1 percent from the previous quarter, while investment in intellectual property products rose 2.3 percent.

Private consumption, however, fell 0.2 percent as spending on both goods and services declined.

Strikes in the automobile industry delayed deliveries of finished vehicles, while a decline in stock trading volume from the previous quarter also weighed on consumption of financial services.

The BOK estimated that private consumption would have increased 0.4 percent without these factors.

Cumulative economic growth through the third quarter reached 3.6 percent from the same period last year, which surpasses the BOK's full-year growth forecast of 3.3 percent issued in August.

Even if the economy records zero growth in the fourth quarter from the previous quarter, annual GDP growth would still reach 3.6 percent. If fourth quarter growth reaches 1.4 percent or more, full-year growth could hit 4 percent.

The key factors for the final quarter will be whether semiconductor exports maintain their momentum and how strongly private consumption rebounds.

“Starting in the fourth quarter, semiconductor companies will begin paying cash dividends, while the recent decline in the dollar-won exchange rate, which reflects a stronger won, could significantly lower import prices and help boost consumers' purchasing power,” said Lee Dong-won, director-general of the BOK's economic statistics department.

“Performance bonuses from semiconductor companies are also due to be paid in the first quarter of next year, which should provide another boost to private consumption.”

Real gross domestic income (GDI), which measures the purchasing power of income generated through domestic production, rose 3.4 percent, far outpacing real GDP growth.

Real GDI growth tends to accelerate when raw material prices fall or export prices rise.

With semiconductor prices continuing to climb and import prices, including those of crude oil, declining, Korea's terms of trade improved further.

Real GDI surged 18.8 percent from a year earlier, the strongest increase in 48 years and nine months since the fourth quarter of 1977, when it rose 19 percent during Korea's period of rapid economic growth. Korea is also on the verge of reaching $40,000 in per capita gross national income (GNI).

“Korea's per capita GNI is virtually certain to reach the $40,000 range this year,” the Ministry of Finance and Economy said Tuesday.

It has taken Korea 12 years to reach this milestone since its per capita GNI entered the $30,000 range in 2014.

By comparison, Group of 7 countries took an average of 3.9 years to move from the $30,000 range to the $40,000 range, based on World Bank data. The transition took seven years in the United States, four years each in Japan, Italy and Germany, three years each in France and Canada and two years in Britain.

With export-led growth remaining strong and incomes also improving, the likelihood of another benchmark interest rate hike by the BOK before the end of the year has increased.

The central bank believes robust economic growth could intensify demand-side inflationary pressures.

“Core inflation next year will also likely exceed our August forecast of 2.5 percent,” BOK Gov. Shin Hyun-song said on Thursday. Core inflation excludes volatile energy and food prices.

“I believe we need to maintain our current restrictive monetary policy stance and continue responding until we are confident that inflation is steadily converging toward our 2 percent target.”

BY OH HYO-JEONG [[email protected]]