Despite Solid Q3 Growth Rate... Warning Lights On in the Trade Front (Comprehensive)

Even with Slight Contraction in Q4,
Annual 2.6% Target Likely Achievable
Dark Clouds over Interest Rates and Commodity Prices
Bond Market Instability Raises Concerns of Liquidity Crunch

[Asia Economy reporters Seo So-jung and Moon Je-won] Although the South Korean economy achieved an unexpected growth rate of 0.3% in the third quarter of this year, negative outlooks surrounding the overall economy are deepening due to steep interest rate hikes, rising raw material prices, and worsening terms of trade. Amid a continued decline in exports, companies are increasingly struggling due to investment sentiment contraction and liquidity shortages caused by recent bond market instability, leading to analyses that growth is likely to sharply slow down from the fourth quarter onward.

Looking at the real Gross Domestic Product (GDP) growth rate for the third quarter announced by the Bank of Korea on the 27th, economic growth this quarter was driven by private consumption and facility investment. Their contributions to growth were 0.9 percentage points and 0.4 percentage points respectively, helping to prevent negative growth. However, net exports, which have led South Korea's economic growth so far, actually pulled down the growth rate by 1.8 percentage points. This is the largest negative contribution to growth since the second quarter of 2020 (-3.8 percentage points), when COVID-19 spread widely, and the negative impact has been expanding for three consecutive quarters.

Examining the third quarter growth rate by economic activity, the service sector showed growth while manufacturing declined. Manufacturing growth rates fell after recording 3.3% in the first quarter, dropping to -0.7% in the second quarter and -1.0% in the third quarter. This was due to decreased performance in most fields such as computers, electronic and optical devices, and chemical products. Growth continues mainly in agriculture, forestry, and fisheries (5.5%) and the service sector (0.7%), but if private consumption and services begin to falter due to ongoing high inflation and high interest rates, growth is also likely to sharply decline.

Real Gross Domestic Income (GDI) also decreased by 1.3% in the third quarter following a 1.1% decline in the second quarter. Although real GDP increased by 0.3%, the terms of trade worsened because import prices, such as crude oil, rose higher than export prices like semiconductors.

The Bank of Korea expects that consumption and facility investment in the third quarter prevented negative growth, allowing the annual growth forecast of 2.6% to be achieved. Hwang Sang-pil, head of the Bank of Korea’s Economic Statistics Department, said, "So far, private consumption growth has slowed when looking at card usage amounts, but it remains at a high level," adding, "Even if the growth rate in the fourth quarter is zero or slightly negative, the annual target of 2.6% is likely to be met." He also noted, "The fact that exports have decreased compared to the same period last year as of the 20th of this month is a risk factor."

Experts assessed that it is difficult to be optimistic about the economic outlook for the fourth quarter and next year as domestic and international economic uncertainties expand and the export decline continues. Professor Hwang Yoon-jae of Seoul National University’s Department of Economics said, "With the ongoing interest rate hike trend and increasing uncertainties in domestic and international conditions, financial market instability is growing," expressing concern that "consumption, which has supported GDP so far, is shrinking, which could cause growth to slow."

Professor Ha Jun-kyung of Hanyang University’s Department of Economics noted, "Exports of South Korea’s key products such as semiconductors are decreasing, adversely affecting the current account balance, and if the economic recession intensifies, the impact could be even greater." Professor Kim Jung-sik, Professor Emeritus at Yonsei University, also said, "The International Monetary Fund (IMF) forecasts that South Korea’s economic growth rate will fall to around 2% next year," adding, "Since exports are likely to remain sluggish until next year, the economic outlook is not bright."

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