South Korea Q3 GDP growth hits 5-year high on pent-up post-Mers domestic demand, recovery doubts linger

Hanjin Shipping's container terminal at the Busan New Port in 2013.
Hanjin Shipping's container terminal at the Busan New Port in 2013.PHOTO: REUTERS

SEOUL (REUTERS) - South Korea's economic growth accelerated to its fastest in more than five years as a sharp recovery in domestic demand more than offset a drop in exports, but policymakers stopped short of saying the consumption recovery would be sustained.

Gross domestic product grew by a seasonally adjusted 1.2 per cent in July-September versus the second quarter, Bank of Korea (BOK) data showed on Friday (Oct 23), quadrupling from a 0.3 per cent quarterly rise and the fastest since the second quarter of 2010.

However the consumption recovery was largely driven by pent-up demand from both households and the government following the deadly outbreak of the Mers virus in the second quarter, and may not last, analysts said. High household debt also undermines the sustainability of the spending surge.

Exports are expected to continue falling through year-end, dragged down by a slowing China, South Korea's biggest trade partner.

"The contribution from consumption is growing, but I cannot pinpoint what the trend will be going forward," Jeon Seung-cheol, who heads the Bank of Korea's statistics department, told reporters.

BOK Governor Lee Ju-yeol also refrained from predicting what consumption would be like in the fourth quarter when asked by reporters on the sidelines of a conference in Seoul on Friday.

The median forecast in a Reuters survey of 21 analysts was for Asia's fourth-largest economy to post growth of 1.0 per cent in the third quarter, with predictions ranging from 0.6 per cent to 1.4 per cent.

The Bank of Korea has lowered its policy interest rate by a combined 50 basis points to 1.50 per cent in two steps this year while a supplementary budget was passed earlier this year to cushion the impact of weak global demand.

The central bank estimated exports fell by 0.2 per cent on-quarter in the third quarter, the first contraction in a year, while private consumption rose 1.1 per cent after contracting by 0.2 per cent in the April-June period, growing at the fastest pace since the third quarter of 2013.

Both Hyundai Motor and sister carmaker Kia Motors expressed concern this week over prolonged external uncertainties as well as rising competition as the South Korean won firms. The local currency was up 1 per cent against the US dollar early on Friday.

"As Korea's output gap continues to stay negative and deflationary risk remains high, we are still calling for a rate cut of 25 bps from December to end of Q1 2016, followed by another cut in Q2," ANZ Bank said in a note, citing uncertainties outside South Korea.

On a year-on-year basis, South Korea's gross domestic product rose 2.6 per cent in the September quarter from a year earlier, beating a median 2.5 per cent rise forecast in the Reuters survey and speeding up from 2.2 per cent in the second quarter.