Q3 Economic Growth Rate Stalls at 0.1%, Annual 2.4% Target Becomes Difficult
Market Forecasts 2.2~2.3%
Growth Shock Likely to Increase Pressure on BOK for Rate Cut
Due to weaker-than-expected exports, South Korea's economic growth rate for the third quarter stood at 0.1%, leading to an annual growth rate that is also expected to fall short of the Bank of Korea's previous forecast of 2.4%. As both domestic demand and export improvements slow down more than anticipated, pressure for further cuts to the benchmark interest rate by the Bank of Korea is expected to increase.
Q3 GDP Growth Rate at 0.1%, Significantly Below Expectations
According to the Bank of Korea on the 25th, South Korea's real gross domestic product (GDP) growth rate for the third quarter was 0.1%, falling short of the initial forecast of 0.5%. While domestic demand improved, the slowdown in export growth caused the growth rate to underperform expectations.
With the third-quarter economic growth rate falling below projections, it is expected to be difficult for the Bank of Korea to achieve the 2.4% economic growth rate for this year that it forecasted in August. To reach an annual growth rate of 2.4%, the fourth-quarter growth rate would need to exceed 1.2% quarter-on-quarter, which is challenging under the current economic conditions.
Shin Seung-chul, Director of the Economic Statistics Bureau at the Bank of Korea, explained, "There are signs that various economic uncertainties are materializing, so we lowered the forecast from 2.5% to 2.4% in August. Now that the third-quarter results are out and uncertainties have been confirmed, I expect the growth rate to be revised downward again in next month's economic outlook."
Bank of Korea Governor Lee Chang-yong also stated early that day at the International Institute of Finance (IIF) conference held in Washington DC, "We had been expecting a growth rate of 2.4% for this year and 2.1% for next year. Since the third-quarter GDP figures were released yesterday and exports were weaker than expected, it seems necessary to review the growth rate again in November."
The market widely anticipates that the Bank of Korea will lower this year's economic growth forecast to 2.3% or 2.2% in the November economic outlook. This is significantly lower than the South Korean government's forecast of 2.6% and the 2.5% forecast by the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD).
Samsung Securities downgraded its economic growth forecast for this year from 2.5% to 2.3% immediately after the GDP announcement the previous day. Korea Investment & Securities and Meritz Securities each lowered their forecasts from 2.4% to 2.2%.
Lee Seung-hoon, an economist at Meritz Securities, explained, "The deepening slump in housing construction appears to have been a major cause of the economic downturn in the third quarter, combined with a decrease in export volumes. Considering that exports weakened more than expected in October and the global manufacturing sector recovery may be slow, we have lowered our growth forecast."
Moon Da-woon, a researcher at Korea Investment & Securities, predicted, "Although exports, which recorded negative growth, are expected to return to positive in the fourth quarter, the sluggish trend is likely to continue until the first half of next year. The manufacturing sector is also expected to show weakness due to the slowdown in export momentum."
Park Sang-hyun, a senior advisor at iM Securities, evaluated, "The third-quarter domestic GDP growth rate recorded a shockingly low 0.1% quarter-on-quarter. Considering that the second-quarter GDP growth rate was -0.2%, this is an even more disappointing growth level, making it practically difficult to achieve the Bank of Korea's annual growth forecast of 2.4% for this year."
Possible Additional Interest Rate Cut as Early as Next Month
There is also speculation that the Bank of Korea may cut the benchmark interest rate once more at the monetary policy meeting next month. Until now, the market consensus was that there would be no further rate cuts this year, but the growth shock has changed the atmosphere.
Expectations have grown that the Bank of Korea will cut rates once more as early as next month or by early next year at the latest. In fact, following the Bank of Korea's GDP announcement the previous day, government bond yields fell across the board in the bond market. This is seen as reflecting the market's anticipation of a rate cut.
Moody's Analytics, a subsidiary of the international credit rating agency Moody's, released a report the previous day predicting that the Bank of Korea will discuss cutting the benchmark interest rate next month due to the weaker-than-expected third-quarter Korean economy. The report stated, "Although the Bank of Korea has emphasized the need to curb household debt growth and rising real estate prices, a rate cut will be on the discussion table at the November Monetary Policy Committee meeting. The weak third-quarter GDP growth rate may also make it difficult for the Bank of Korea to achieve its 2.4% growth forecast for this year."
Kim Sang-hoon, a researcher at Hana Securities, said, "Looking at the third-quarter results, growth weakness centered on exports occurred, and the press conference still highlighted significant uncertainty in the outlook. Even if the rate is held steady in November, the number of Monetary Policy Committee members who consider additional cuts appropriate within the forward guidance is likely to increase compared to October."
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