Export cooling down, South Korea's GDP narrowly avoids negative growth

Due to a cooling in exports, South Korea's economy showed weak growth in the third quarter, narrowly avoiding negative growth once again. On Thursday, October 24th, preliminary data released by the Bank of Korea revealed that South Korea's GDP in the third quarter increased by a mere 0.1% on a seasonally adjusted basis, far below economists' expectations of 0.5% and lower than the quarterly forecast released by the Bank of Korea in August. However, following a 0.2% economic contraction in the second quarter, this growth margin barely prevented it from entering a "technical recession (usually defined as two consecutive quarters of negative growth)." Year-on-year, South Korea's GDP grew by 1.5%, also significantly lower than the previous quarter's 2.3% and economists' expectations of 2%, marking the slowest growth rate since the third quarter of 2023. Export Cooling Drags Down Economic Growth In terms of sectors, the report indicated that South Korean household consumption performed well, increasing by 0.5% this quarter, higher than the previous -0.2%; and due to increased spending on equipment such as chip manufacturing machines, equipment investment grew by 6.9%. However, construction and exports dragged down South Korea's GDP, with construction investment declining by 2.8% and exports falling by 0.4% due to the impact of automobiles and chemical products, marking the first decline since the fourth quarter of 2022. Nevertheless, South Korea's imports increased by 1.5%. Furthermore, as one of the strongest exporting countries globally, South Korea's technology industry has always been a driver of its overseas income. However, in recent months, South Korea's semiconductor export growth has slowed for several consecutive months. At the same time, the price growth of memory chip shipments in September has also slowed down, raising doubts about the intensity of global demand for AI and the momentum of chip sales reaching its peak. Due to limited overall economic growth, some analysts suggest that this may prompt the Bank of Korea to advance its next rate cut. Shin Seung Cheol, head of research at the Bank of Korea, indicated that the Bank of Korea may lower its economic growth forecast at the next month's rate decision meeting. Previously, the Bank of Korea forecasted in August that GDP would grow by 2.4% this year. In addition, the South Korean Ministry of Trade stated on Tuesday that export growth from October to December may slow down, but it will remain positive. Economic Recovery Constrained, South Korea May Accelerate Rate Cut Pace This month, the Bank of Korea implemented its first rate cut since mid-2020, stating that there is room for further rate cuts and will carefully weigh the timing of further easing. Bank of Korea Governor Rhee Chang-yong stated, "When the Bank of Korea decided to lower the interest rate by 25 basis points to 3.25%, it considered the country's economic growth potential and slowing inflation." Due to the drag on the economy from the cooling of South Korean exports, many scholars are beginning to anticipate that South Korea will further accelerate the pace of rate cuts. Economist Hyosung Kwon stated, "South Korea's third-quarter GDP rebound is much weaker than expected, which may lead the Bank of Korea to implement the next rate cut earlier than we anticipated. Our basic view is that the Bank of Korea will further ease in February (next year), but now we believe a rate cut in January is also possible Lee Seung-suk, a researcher at the Korea Economic Institute, also stated: "This is a dilemma, but **if the economic situation worsens more than expected, the Bank of Korea will need to further cut interest rates. No one expected the export momentum to 'fizzle out' so early. With increasing uncertainty in the U.S. economy and escalating risks of the Middle East conflict, they are unlikely to meet expectations." However, the vast majority of economists expect the Bank of Korea to maintain interest rates at the next month's policy meeting and to cut rates twice in the first half of next year. At the same time, considering weak exports and economic growth prospects, it is expected that loose policies will be implemented almost throughout next year. It is worth noting that so far, South Korean President Yoon Suk-yeol has still refused to approve additional spending to support the economy, instead seeking to encourage the private sector to lead growth while limiting the role of fiscal spending. Analysts believe that his policies reflect concerns about the national debt burden, which increased during the pandemic when his predecessor, Moon Jae-in, deployed trillions of Korean won in additional budgets to support small businesses and consumer confidence