Korea still uncertain about 1.4% growth target despite Q3 GDP increase

Bank of Korea (BOK) officials announce preliminary data of Korea's economic growth for the third quarter at the bank's headquarters in downtown Seoul, Thursday. Yonhap

Korea’s economy grew 0.6 percent year-on-year in the third quarter, expanding for the third quarter in a row, according to Bank of Korea (BOK) preliminary data released on Thursday.

But whether growth can reach the annual target of 1.4 percent remains uncertain, according to analysts, as heightening economic risks could disrupt the pace of recovery in the twin engines of growth ― exports and private spending.

The 1.4 percent growth target is backed by both the BOK and the Ministry of Economy and Finance.

“The course of recovery is still distant from the economic rebound as underlined by the government in the second half of the year,” Park Sang-hyun and Ryu Jin-lee, both economists at Hi Investment & Securities, said in a report they co-authored.

“We have to say reaching the annual growth will thus be tricky.”

The economists noted that exports expanded 3.5 percent year-on-year after declining 0.9 percent three months earlier, while private consumption grew 0.3 percent year-on-year after contracting 0.1 percent in the previous quarter.

Correspondingly, gross domestic product (GDP) increased 0.6 percent following another 0.6 percent gain in the April-June period and a 0.3 percent gain in the January-March period.

Under the circumstances, the Hi Investment & Securities economists said the breakout of the Israel-Hamas war on Oct. 13 could add to volatility in global oil prices and negatively affect manufacturing costs.

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A hike in production costs could weaken export competitiveness and private spending.

In an apparent reflection of the unfavorable business environment, domestic companies’ business sentiment index (BSI) weakened to 69 for November, down from 73 the previous month, in a BOK survey released on Thursday.

The index measures corporate prospects for business conditions for the coming month. A reading below 100 means pessimists outnumber optimists.

Lee Sang-ho, head of the economic policy team at the Korea Economic Research Institute (KERI), assessed that geopolitical risks in the Middle East are increasingly prompting investors’ preference for safe-haven assets and further weakening the value of the Korean won against the U.S. dollar.

“In return, the pace of decline in monthly exports can widen again in the fourth quarter,” Lee said.

He was referring to the outbound shipments that fell for the 12th consecutive month in September but logged the smallest year-on-year decline at 4.4 percent so far for this year.

In relation to the won-dollar exchange rate, the KERI economist said the U.S. Federal Reserve, although it has paused rate hikes twice since June, is still open to another hike if U.S. consumer price inflation does not come under control.

Regarding private spending, Lee said the resurgent growth of Korea’s consumer prices and costly borrowing rates could weigh on consumer sentiment.

Consumer price inflation rose 3.4 percent in August and then 3.7 percent in September, after softening to a 25-month low of 2.3 percent in July.

The benchmark interest rate stands at 3.5 percent following an unprecedented seven consecutive rate hikes through January this year.

Meanwhile, the BOK maintained the view that the economy may grow in line with its own growth estimate for the year if GDP growth hits 0.7 percent for the final three months of the year.

Finance Minister Choo Kyung-ho voiced a similar view. “The 2023 GDP is growing under the trajectory for the 1.4 percent growth target," he said, "although there are uncertainties involving the Israel-Hamas war, among others.”