Korea's GDP Growth in the Third Quarter of 2023

The Korean economy maintained stability with consistent growth in the third quarter of 2023, thanks to a rebound in exports. This resilience is noteworthy, especially considering the central bank's adherence to a restrictive monetary policy and the presence of various imminent risks including the Israel-Palestine conflict.

Korea saw its gross domestic product (GDP) grow by 0.6% in the third quarter of 2023 compared to the previous three-month period, according to the latest data from the Bank of Korea (BOK). This marks the third consecutive quarter of economic growth. However, it is uncertain whether the economy can meet the annual growth target of 1.4%, as heightened economic risks may disrupt the pace of recovery in key growth drivers such as exports and private spending.

The main contributor to the third-quarter GDP growth was exports, which increased by 3.5% quarter on quarter. This represents a turnaround from the previous quarter's 0.9% decline. Compared to the same period of the previous year, exports grew by 3.2%. Specifically, the semiconductor sector, a crucial component of the Korean economy, seems to be on a path to recovery. The decline in prices has alleviated, and both exports and production expanded for the second consecutive quarter.

Another key factor fueling GDP growth was a recovery in consumer spending, which showed a quarter-on-quarter increase of 0.3%. The improvement was backed by the dining, hospitality, and entertainment sectors. Meanwhile, government spending also increased by 0.1% compared to a decline of 2.1% in the preceding quarter.

Construction investment also rebounded from a contraction, growing by 2.2%, thanks to a rise in investment spending on both building and civil construction. On the other hand, equipment investment had a negative impact on economic growth in the July – September period. It decreased by 2.7% compared to three months before primarily because of a reduction in investment spending on machinery.

Consumer price inflation increased to 3.4% in August and further rose to 3.7% in September, rebounding from a 25-month low of 2.3% recorded in July. In response, the BOK decided to maintain its current benchmark interest rate of 3.5% at the last policy meeting of the year in November, recognizing the need to keep interest rates elevated for an extended period to mitigate ongoing inflation risks. The decision to freeze the rate marks the seventh straight pause, and the rate has held steady at 3.5% since January 2023.  

Under these circumstances, the outbreak of the Israel-Hamas war in October 2023 is likely to increase volatility in global oil prices. This, in turn, could have adverse implications for manufacturing costs. A rise in production costs may weaken Korea’s export competitiveness and hinder private spending. The renewed growth of consumer prices and the elevated borrowing rates may put pressure on consumer sentiment. The government is actively monitoring both economic and national security conditions to prevent an extended economic downturn from unfolding.