Korea's GDP Growth in the Third Quarter of 2024

In the third quarter of 2024, the Korean economy rebounded from the contraction of -0.2% in the second quarter, achieving a quarter-on-quarter growth of 0.1% and a year-on-year increase of 1.5%, supported by a recovery in private consumption. However, the subdued performance of exports, which have traditionally been a cornerstone of Korea's economic stability, resulted in slower-than-anticipated growth. Additional challenges, including volatility in the semiconductor market, elevated exchange rates, and domestic political turmoil, have further heightened uncertainties regarding the country's future economic outlook.

(Source: Bank of Korea, Oct. 25, 2024)

Private consumption increased by 0.5%, driven by higher spending on goods (such as passenger cars and telecommunications devices) and services (including healthcare and transportation). While this marks an improvement from the -0.2% contraction in the second quarter, the growth rate has remained in the 0% range since last year—0.1% in Q3 2023, 0.4% in Q4 2023, and 0.7% in Q1 2024—indicating a sluggish recovery trajectory. Government consumption grew by 0.6%, primarily driven by increased social security benefits in kind, such as health insurance benefits payment. Construction investment, however, contracted by 2.8% as both building and civil engineering activities declined. On the other hand, facility investment surged by 6.9%, supported by growth in both machinery (including semiconductor manufacturing equipment) and transportation equipment (such as aircraft). Exports decreased by 0.4%, primarily due to declines in automobiles and chemical products, while imports rose by 1.5%, driven by an increase in machinery and equipment. This marks the first negative growth in exports in six quarters, since the fourth quarter of 2022 (-3.7%). The decline was largely influenced by factors such as the Korean GM labor strike and the "EV chasm"—a temporary stagnation in demand—that negatively impacted shipments of automobiles and chemical products, including secondary batteries. Furthermore, the growth rate of semiconductor and IT-related exports showed a slower pace compared to the second quarter.

*Figures in (  ) refer to year-on-year growth rates. (Source: Bank of Korea, Oct. 25, 2024)

In 2024, real Gross National Income (GNI) grew by 0.5% in the third quarter, following a 2.5% increase in the first quarter and a 1.3% contraction in the second quarter. On a year-on-year basis, GNI expanded by 2.5%, outpacing the real GDP growth rate of 0.1%.

On October 11, 2024, the Monetary Policy Committee decided to lower the benchmark interest rate by 0.25%p, from 3.5% to 3.25% per annum. This marks a shift from the prolonged tightening stance that began in August 2021, when the rate was raised from 0.5% to 0.75% and then incrementally to a peak of 3.5% in January 2023. The rate was subsequently held steady for 13 consecutive decisions through August 2024, representing the longest period of unchanged rates in the committee's history. The rate cut in October signifies a pivot toward monetary easing, ending a 38-month period of policy tightening.

At the subsequent Monetary Policy Committee meeting on November 28, 2024, the benchmark interest rate was further lowered by 0.25%p, from 3.25% to 3% per annum.

In the financial and foreign exchange markets, exchange rate volatility increased due to the strengthening of the US dollar. However, amid stable inflation rates and a slowdown in household debt growth, downward pressure on economic growth intensified. In response, the Monetary Policy Committee deemed it appropriate to cut the benchmark interest rate to mitigate downside risks to the economy.

(Source: Bank of Korea, Nov. 28, 2024)

The global economy faces heightened uncertainty regarding growth and inflation due to the course of economic policies under the new U.S. administration. In international financial markets, while the trend of policy rate cuts continued among major economies, U.S. long-term treasury yields rose significantly, and the dollar appreciated considerably. Going forward, the global economy and international financial markets are expected to be influenced by the implementation of economic policies by the new U.S. administration, shifts in monetary policies of major economies, and geopolitical risks.

The Korean economy has shown signs of weakening, with a moderate recovery in domestic demand and a slowdown in export growth. Although the unemployment rate remains low, the scale of employment growth has continued to diminish. Moving forward, domestic consumption is expected to continue its modest recovery, but export growth is likely to fall below initial projections due to intensifying competition in key industries and the strengthening of protectionism. As a result, this year's and next year's growth rates are anticipated to be 2.2% and 1.9%, respectively, falling short of the August forecast of 2.4% and 2.1%. However, the growth trajectory is subject to significant uncertainties, including changes in trade conditions, trends in IT exports, and the pace of domestic demand recovery.

Inflation in Korea remained stable. In October, the consumer price inflation rate temporarily dropped significantly to 1.3%, driven by falling oil prices, while the core inflation rate (excluding food and energy) also slowed to 1.8%. Short-term inflation expectations remained unchanged from the previous month at 2.8%. Looking ahead, while the exchange rate increase may exert upward pressure on inflation, the downward influence of declining global oil prices and weak demand pressures is expected to maintain overall price stability.

The Monetary Policy Committee will manage monetary policy with a focus on ensuring price stability at the target level over the medium term while closely monitoring economic growth and maintaining financial stability. Accordingly, future monetary policy will carefully assess the impact of interest rate cuts on inflation, growth, household debt, and exchange rates, as well as the trade-offs among these policy variables, to determine the pace and scope of further rate adjustments.

Korean Economic Outlook Update

The Korean economy is expected to grow by 2.2% in 2024, lower than the August forecast of 2.4%, as the moderate recovery in domestic demand and the gradual slowdown in previously robust export growth have weakened the overall growth trajectory according to the latest projection released by the Bank of Korea in November 2024. In 2025, growth is anticipated to remain moderate, led by consumption. However, intensified competition with major countries in key industries and the strengthening of protectionist policies are projected to result in weaker-than-expected export growth, bringing the annual growth rate down to 1.9% from the initial forecast of 2.1%. By 2026, economic growth is forecasted to slow further to 1.8%, driven by a decline in export-led growth due to the global economic slowdown and the full impact of U.S. tariff increases.

The current account surplus is projected to be slightly lower at approximately USD 80 billion, compared to a surplus of USD 90 billion in 2024. Going forward, the current account balance will be significantly influenced by U.S. economic policies, the global semiconductor market, and the pace at which China increases its semiconductor self-sufficiency.

The scale of employment growth is projected to slow to 170,000 in 2024 and 130,000 in 2025. This slowdown is attributed to the declining working-age population, which is reducing the growth rate of labor supply, as well as weakening labor demand in the manufacturing and construction sectors.

(Source: Bank of Korea, Nov. 2024)

By sector, private consumption is expected to accelerate its recovery pace, supported by improvements in household real income. Construction investment is likely to decline due to reduced orders and construction starts, though the contraction is anticipated to be less severe than initially expected. Equipment investment is expected to rebound in the second half of 2024 and maintain a favorable trajectory thereafter. Investment in intellectual property products is projected to show moderate growth in 2024, followed by an accelerated growth trend in 2025. Goods exports continue to show solid growth, supported by favorable conditions in the global IT sector. However, the growth rate of goods exports is expected to slow significantly in 2025, with an increase of 1.5% compared to 2024, while maintaining a steady upward trend. Customs-cleared imports, which have been in decline, are projected to gradually shift to an expanding growth trend.

(Source: Bank of Korea, Nov. 2024)