Q3 National Income Up 1.6%... Bank of Korea Says 1.4% Growth Rate Possible This Year (Comprehensive)

Growth Rate Matches Preliminary Figure of 0.6%

In the third quarter of this year, South Korea's economy grew by 0.6% quarter-on-quarter in real gross domestic product (GDP), driven by a recovery in exports centered on semiconductors. With improved terms of trade, real gross national income (GNI) increased by 1.6% compared to the second quarter. Maintaining positive growth for three consecutive quarters, the Bank of Korea expects the annual growth forecast of 1.4% for this year to be easily achievable. However, with the ongoing Israel-Hamas war and concerns over domestic demand stagnation due to high interest rates and inflation, it is analyzed that a significant rebound in growth rates in the future will be difficult.

According to the '2023 Third Quarter National Income (Preliminary)' data released by the Bank of Korea on the 5th, real GNI in the third quarter was 481.1 trillion won, up 1.6% from the previous quarter. Gross national income (GNI) is calculated by adding net primary income from abroad (the income earned by Koreans overseas minus the income earned by foreigners in Korea) to GDP. In the third quarter, real net primary income from abroad decreased from 10.3 trillion won to 5.7 trillion won, but due to improved terms of trade, real trade losses shrank from 34 trillion won to 25 trillion won, exceeding the real GDP growth rate (0.6%).

Choi Jeong-tae, Director of the National Accounts Department at the Bank of Korea, explained, "The reason for the decrease in real net primary income from abroad is that with the implementation of the exclusion of dividend income from overseas subsidiaries in January this year, domestic corporations received expanded tax benefits on dividends from overseas subsidiaries, leading to a significant increase in direct investment dividend income in the first and second quarters, but it decreased in the third quarter due to the base effect."

Three Consecutive Quarters of Positive Growth Due to Semiconductor and Export Recovery

The real GDP growth rate for the third quarter of this year (preliminary, quarter-on-quarter) was recorded at 0.6%, the same as the flash estimate announced on October 26. Quarterly growth rates turned negative in the fourth quarter of last year (-0.3%) due to a sharp decline in exports, but have maintained continuous growth this year with 0.3% in the first quarter, 0.6% in the second quarter, and 0.6% in the third quarter.

Looking at the third quarter growth rate by sector, most items increased except for facility investment. Private consumption rose by 0.3%, centered on services such as food, accommodation, and entertainment. Government consumption increased by 0.2% due to increased social security benefits such as health insurance payments. Construction investment increased by 2.1% as both building and civil engineering construction rose. On the other hand, facility investment decreased by 2.2% due to a decline in machinery.

Exports increased by 3.4%, led by semiconductors, machinery, and equipment, while imports rose by 2.3%, mainly petroleum products. Compared to the flash estimate, construction investment was revised down by 0.2 percentage points, exports and imports were adjusted down by 0.1 and 0.3 percentage points respectively. Government consumption and facility investment were revised up by 0.2 and 0.5 percentage points respectively.

By industry, electricity, gas, and water supply decreased, but manufacturing and construction showed growth. Agriculture, forestry, and fisheries increased by 1.5%, centered on livestock and fishery catches. Manufacturing rose by 1.4%, with increases in computers, electronic and optical equipment. Notably, the information and communication technology (ICT) manufacturing sector grew by 3.3%. Construction also increased by 2.3%, with growth in both building and civil engineering construction. Services increased by 0.3%, despite declines in wholesale, retail, accommodation, and food services, due to increases in cultural and other services. Meanwhile, electricity, gas, and water supply decreased by 0.5% compared to the previous quarter.

Nominal gross national income (GNI) in the third quarter increased by 0.5% from the previous quarter. However, nominal net primary income from abroad sharply decreased from 13.7 trillion won to 4.8 trillion won, falling short of the nominal GDP growth rate (2.2%).

Concerns Over Consumption Contraction Due to High Interest Rates

Earlier, the Bank of Korea maintained its growth forecast of 1.4% for this year in the revised economic outlook announced on the 30th of last month. The recovery in exports centered on semiconductors and the easing of sluggish exports to China brought the annual forecast closer to achievement. Director Choi explained at a press briefing that "the likelihood of the annual economic growth rate reaching 1.4% this year has slightly increased compared to the time of the flash estimate announcement," adding, "facility investment and government consumption have improved compared to the flash estimate." Regarding the semiconductor industry, he said, "Considering that memory prices have stopped declining and exports and production have increased quarter-on-quarter for two consecutive quarters, it is seen as entering a recovery phase," and "the contribution of semiconductor production to growth has been positive for two consecutive quarters."

On the other hand, the contraction of consumption due to sustained high interest rates is a worrisome point. Director Choi said, "Employment conditions are positive factors, but there is uncertainty about inflation, so consumption constraints also remain," adding, "However, recent data show that private consumption is maintaining an increasing trend in personal credit card usage, so consumption is expected to continue a moderate recovery trend."

Professor Kang Seong-jin of Korea University’s Department of Economics said, "The most concerning factor was the rise in international oil prices due to the Middle East war, but recently it has not risen as much as expected," and "With the semiconductor industry recovering, imports have increased less than exports, and private and government consumption expenditures are also improving, so it seems that the Bank of Korea’s growth forecast will hold after the fourth quarter." However, Professor Kang added, "Since high inflation and high interest rates are expected to continue until the first half of next year, government inflation management could be the biggest variable," and "If high inflation is not controlled, household debt delinquency rates will rise, and there will be no room to lower interest rates, which could negatively affect growth such as private consumption."

Professor Kim Jeong-sik, emeritus professor of the Department of Economics at Yonsei University, said, "Industrial production, consumption, and investment all showed a decline compared to the previous month in October, and with the continuation of high interest rate policies, there are concerns about an economic recession," emphasizing, "The government needs to increase fiscal spending within the range that does not severely damage fiscal soundness to stimulate domestic demand."

Export containers are being loaded onto a ship at Busan North Port. Photo by Jinhyung Kang aymsdream@

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