Q3 GDP Posts a 'Surprise'... '3.6% Growth This Year Even with Zero Growth in Q4' (Comprehensive)

Q3 GDP Posts Surprise 1.0% Growth QoQ
Semiconductors Drive Surprise... Contributions from Exports and Investment Rise
Private Consumption Falls on Unusual Factors: "Stock Market Correction + Auto Strike"
Cumulative Growth Reaches 3.6% Through Q3;

South Korea's economy posted a surprise 1.0% growth quarter on quarter in the third quarter of this year, buoyed by increased exports and investment amid a semiconductor boom. Private consumption, however, declined as financial services contracted amid a decrease in stock trading and passenger car consumption fell in the wake of a strike. The year-on-year growth rate of real gross domestic income (GDI), an indicator of real purchasing power, reached its highest level in nearly 49 years.

Annual growth this year is now increasingly likely to climb into the high 3% range. Cumulative growth through the third quarter has already reached 3.6%, meaning the economy would achieve annual growth of 3.6% even if fourth-quarter growth were 0.0% quarter on quarter. Mathematically, annual growth of 4% would be possible if fourth-quarter growth rose to at least 1.4%. The Bank of Korea has said it would substantially raise its previous growth forecast of 3.3% in its revised economic outlook next month. The key variable is expected to be the extent of the recovery in private consumption.

Semiconductors Drive Surprise Growth... Contributions from Exports and Facility Investment Rise

On the 27th, the Bank of Korea announced that real gross domestic product (GDP) grew 1.0% quarter on quarter in the third quarter, according to its advance estimate. The figure was 0.97% to two decimal places. This was well above the Bank of Korea's forecast of 0.3% growth for the third quarter, released in August. Quarterly growth rebounded sharply from -0.1% in the fourth quarter of last year to 1.8% in the first quarter of this year. After growing 0.6% in the second quarter, the economy also exceeded expectations in the third quarter. Year on year, it grew 3.4%, maintaining growth of more than 3% for three consecutive quarters. However, the rate edged down from 3.7% in the second quarter to 3.4% in the third.

The higher growth rate resulted from continued increases in semiconductor-led exports and facility investment, along with a rise in government consumption. Domestic demand increased quarter on quarter in government consumption, construction investment and facility investment, while private consumption declined. Among consumption categories, government consumption rose 1.9% as both spending on goods and services (including purchases of supplies and consumables, and operating expenses) and National Health Insurance benefit payments increased. Private consumption, by contrast, fell 0.2% as purchases of goods such as passenger cars and home appliances declined, along with services such as financial and food services.

"We believe that unusual factors, including lower stock trading commissions and reduced passenger car consumption, lowered private consumption by 0.6 percentage points," said Lee Dongwon, director general of the Bank of Korea's Economic Statistics Department 2. "Private consumption could gradually recover from the fourth quarter of this year through the first quarter of next year." He explained that cash dividends and performance bonuses from semiconductor companies, as well as increased transfer spending in next year's government budget, would support private consumption.

Facility investment rose 4.1% quarter on quarter as investment in machinery, including semiconductor manufacturing equipment, increased. Construction investment also rose 0.7%, led by civil engineering, returning to growth after one quarter. Investment in intellectual property products increased 2.3% as research and development (R&D) and software investment rose. Exports grew 2.3% quarter on quarter, led by semiconductors, machinery and electrical equipment. Imports increased 2.4% as imports of crude oil and semiconductor manufacturing equipment rose.

A breakdown of third-quarter growth contributions by expenditure category shows that domestic demand drove growth. Domestic demand contributed 0.9 percentage points to growth in the third quarter. Specifically, facility investment contributed 0.4 percentage points and construction investment contributed 0.1 percentage points, boosting domestic demand's contribution. By economic sector, the government's contribution of 0.8 percentage points exceeded the private sector's 0.2 percentage points, highlighting government-led growth. "The government had held back some of its budget in the first half in preparation for a prolonged war in the Middle East," Lee said. "We understand that it spent on large-scale construction projects and facility investment in the third quarter."

Net exports (exports minus imports) contributed 0.1 percentage points to growth. Exports lifted the growth rate by 1.1 percentage points, but the increase in imports lowered it by 1.0 percentage point, bringing the contribution below the 0.3 percentage points recorded in the previous quarter.

All major industries recorded growth. Agriculture, forestry and fisheries grew 5.9% quarter on quarter, led by crop cultivation and fishing. Manufacturing grew 2.0% as output of computers, electronic and optical equipment, machinery and equipment increased. Construction grew 2.0%, supported by civil engineering, while services rose 0.2%, led by business services, information and communications, and transportation. However, services growth slowed significantly from 1.0% in the second quarter.

Real GDI in the third quarter, which indicates the real purchasing power of income earned through production, rose 3.4% quarter on quarter, outpacing GDP growth. Compared with the same period last year, it surged 18.8%. The GDI growth rate climbed considerably from 15.7% in the second quarter, reaching its highest level in 48 years and nine months since the fourth quarter of 1977, when it stood at 19.0%. Improved terms of trade, including higher semiconductor prices, contributed to the increase.

Annual Growth Could Reach 3.6% Even with 0.0% Growth in Q4... Private Consumption Is the Key Variable

Cumulative growth through the third quarter stands at 3.6% year on year. Even if fourth-quarter growth is 0.0%, the economy would achieve 3.6% growth for the year. The Bank of Korea has said it would substantially raise its previous forecast of 3.3% in its revised economic outlook next month. Current market forecasts for growth this year are generally converging in the 3.6% to 3.8% range. "We had forecast annual growth of 3.8%, assuming fourth-quarter growth of around 0.83%. Growth is likely to be somewhat less influential than in the first quarter, but even if it falls a little, 3.8% should still be achievable," said Kim Jinuk, chief economist at Citibank. "It will be difficult for the fourth-quarter figure itself to come in much higher, so I expect growth to be in the low 0% range for the quarter and around 3.6% to 3.7% for the year," said Cho Yonggu, a researcher at Shinyoung Securities.

With export and investment strength driven by semiconductors continuing, the extent of a rebound in private consumption is expected to determine the downside risk to fourth-quarter growth. Analysts say semiconductor exports are likely to remain strong through the end of the year. "As Bank of Korea Governor Shin Hyunsong has noted, prices, rather than stock prices, will be an important leading indicator for semiconductors. If semiconductor prices rise in October, semiconductor exports are likely to be strong not only in October but also in November," Kim said, adding that "growth should remain on a strong trend in the fourth quarter as well." Ultimately, the key will be whether private consumption improves in the fourth quarter and how much that, in turn, moves the growth rate. He said it will also be important to watch how much the semiconductor boom translates into expanded private consumption, beyond improving corporate earnings and incomes—in other words, how much of a trickle-down effect emerges.

This content was produced with the assistance of AI translation services.