South Korean Economy Shows Signs of Recovery

By Rahul Trivedi

BENGALURU (Reuters) – The South Korean economy is expected to have returned to growth in the last quarter following a mild contraction in the previous one, aided by an export-led expansion that has offset the effects of higher borrowing costs on domestic demand, according to a Reuters poll.

After an unexpected 0.2% contraction in the April-June quarter, Asia's fourth-largest economy is projected to have grown by a seasonally adjusted 0.5% in the third quarter per the median forecast from 23 economists.

On an annual basis, the economy grew by 2.0% last quarter, according to the median forecast from 26 economists polled between October 15-21, down from 2.3% in the previous quarter.

Khoon Goh, head of Asia research at ANZ, mentioned, "We expect…Q3 GDP data to show lackluster growth. Although exports remained robust, sluggish domestic demand, indicated by various high-frequency metrics such as retail sales and construction, was a drag."

South Korea's monthly exports have increased by nearly 10% this year up to September, primarily driven by semiconductor demand from the United States, aiding the trade-dependent economy in evading a technical recession (defined as two consecutive quarters of decline).

However, recent months have seen a cooling pace in export growth due to moderating trade with China – South Korea's top trading partner – as well as Japan and India.

High borrowing costs are impacting domestic consumption, amid household debt that is among the highest in the developed world.

In an effort to stimulate demand, the Bank of Korea (BOK) cut its policy rate by 25 basis points this month from a 15-year high of 3.50%.

Nevertheless, the BOK is anticipated to maintain its current stance for the rest of the year, with only a projected 50 basis points cut next year, while the U.S. Federal Reserve is expected to lower rates by 150 basis points by the end of 2025 according to separate Reuters polls.

Suktae Oh, chief Korea economist at Societe Generale (OTC:SCGLY), remarked, "A modest rebound in GDP growth should support the BOK pivot seen at the October meeting, but another rate cut in November seems unlikely due to ongoing concerns about the housing market."

With an uneven recovery in China and declining demand from the U.S., South Korea's economic growth is expected to average 2.4% this year, aligning with the central bank's downwardly revised forecasts.