In the third quarter (July-September) of this year, the Korean economy continued to grow thanks to a recovery in exports and consumption in the private sector. However, uncertainties surrounding outlooks on growth for the fourth quarter have increased with consumer and business sentiment deteriorating amid heightened geopolitical risks such as the Israel-Hamas conflict.
Korea’s real gross domestic product (GDP) growth rate stood at 0.6 percent quarter on quarter in the third quarter of this year, according to the Bank of Korea (BOK) on Oct. 26.
After posting a 0.3 percent contraction in the fourth quarter of last year, Korea’s economy rebounded by growing 0.3 percent in the first quarter of this year and grew for the third consecutive quarter.
By sector, net exports drove the growth of the Korean economy in the third quarter. Exports grew 3.5 percent led by semiconductor and machinery exports and petroleum products took the lead in pushing up imports by 2.6 percent. This was a reversal from the second quarter when exports fell by 0.9 percent and imports by 3.7 percent.
Private consumption also rebounded to a 0.3 percent increase from a 0.1 percent decline in the previous quarter.
“Private consumption declined in the second quarter due to weather factors, but base effects played a role in the third quarter,” said Shin Seung-cheol, head of economic statistics at the BOK.
Government consumption swelled by 0.1 percent, mainly due to in-kind social security benefits, and construction investment grew by 2.2 percent, as both building construction and civil engineering work increased. However, plant and equipment investment fell by 2.7 percent due to a slowdown in machinery investment.
The BOK previously set a growth forecast of 1.4 percent for the Korean economy this year. The Korean central bank predicted that the Korean economy will attain the goal if it grows by 0.7 percent in the fourth quarter of this year.
However, the Korean economy is facing a lot of uncertainties due to the Israel-Hamas situation and prolonged belt-tightening in major economies, the BOK said.
“IT and semiconductor market conditions, global supply chain reorganization, and exports to major economies have been key issues, but a recent recovery in the IT and semiconductor markets is expected to ease Korea’s export slump and contribute to Korea’s economic growth to some extent,” Shin said. “Geopolitical risks such as the Israeli-Hamas conflict and the persistence of high interest rates in the United States have increased uncertainties about how they will affect the Korean financial and foreign exchange markets.”
It is unclear whether the growth in the third quarter will continue into the fourth quarter, given external uncertainties. While exports are expected to improve in the fourth quarter, the trade balance is likely to remain in deficit as imports will outweigh exports due to the impacts of oil price hikes.
According to the Korea Customs Service, provisional exports for the first 20 days of October hit US$33.838 billion, up 4.6 percent from the same period last year. Provisional imports in the same period rose by 0.6 percent to US$37.586 billion.
The trade balance for the first 20 days of October was a deficit of US$3.748 billion, up from a deficit of US$488 million in the same period the previous month.
The Israeli-Hamas conflict has also fueled uncertainties over international oil prices.
Consumer sentiment is also on the skids. The Consumer Sentiment Index (CCSI) came in at 98.1 in October, down 1.6 percentage points from 99.7 in September. This was the third consecutive month of decline after reaching 103.2 in July.
Companies showed poor business results. According to the BOK’s October business survey index (BSI) survey, the BSI of all industries stood at 70 in October, down 3 points from 73 in September. It was the lowest in eight months since February’s 69. In particular, the electronics, video and communication equipment industry, which includes the semiconductors sector, fell by 3 points to 59, the lowest point since 56 in February.
This is because the effects of production cuts along with a U.S. announcement of restrictions on semiconductor exports to China were not yet reflected in companies’ actual economic sentiments. As a result, experts forecast that this year’s growth rate may fall below the BOK’s forecast, expressing their concerns over uncertainties about a recovery in the fourth quarter.