[Q&A] Bank of Korea: "Even -0.1% Growth in Q4 Can Achieve 1% Annual Growth"

Press Briefing on Third Quarter Real Gross Domestic Product (GDP)
Domestic Demand Drives Growth... "Trend Likely to Continue in Second Half"
To Achieve 1% Annual Growth... "U.S. Tariffs, Consumption Coupons, and Construction Investment Are Key Variables"

The Bank of Korea assessed that domestic demand, including private consumption, led economic growth in the third quarter of this year. The bank also projected that this trend could continue into the fourth quarter. It calculated that, arithmetically, a minimum growth of -0.1% in the fourth quarter would be required to achieve an annual growth rate of 1% for the year.

Dongwon Lee, Director of Economic Statistics Division 2 at the Bank of Korea, is speaking at the press briefing on the third quarter real gross domestic product (preliminary) held at the Bank of Korea in Jung-gu, Seoul, on the morning of the 28th. Provided by the Bank of Korea

Dongwon Lee, Director of Economic Statistics Division 2 at the Bank of Korea, stated at a press briefing on the "third quarter real Gross Domestic Product (preliminary)" on the 28th, "Although consumer sentiment declined in September and October, it remains at a high level, so it is difficult to say that sentiment has turned downward." He added, "The effect of consumption coupons is expected to be more pronounced in the fourth quarter." Regarding exports, he explained, "The strong export performance is not only due to semiconductors, but also reflects the efforts of Korean companies to increase exports to other countries for items subject to U.S. tariffs." He projected that "whether this effect continues into the fourth quarter could be a variable for the growth rate."

Regarding the background for the third quarter economic growth rate reaching 1.2%, returning to the 1% range for the first time in six quarters, he evaluated, "Private consumption saw a significant increase, driven by improved sentiment, the impact of consumption coupons, and the launch of new products. Facility investment also turned to growth, mainly in semiconductor manufacturing equipment and corporate vehicles." He added, "Despite the high growth rate in the second quarter, exports continued to perform well. In addition, the decline in construction investment was reduced due to the commencement of projects such as ports, railways, and power plants, which also contributed to the growth rate."

The following is a Q&A with Director Lee.

-Please provide the third quarter growth rate to the second decimal place.

▲It is 1.17%.

-What fourth quarter growth rate is needed to achieve an annual growth rate of 1% this year?

▲If the quarter-on-quarter growth rate is between -0.1% and 0.3%, a simple calculation shows that 1% annual growth is possible.

▲In August this year, the Bank of Korea projected a fourth quarter growth rate of 0.2%. If growth proceeds as forecast, achieving 1% annual growth is feasible.

▲On a year-on-year basis, to achieve 1% annual growth, the fourth quarter growth rate needs to be between 1.5% and 1.9%. For 0.9% annual growth, it needs to be between 1.1% and 1.5%.

-You mentioned that consumption coupons contributed to the rebound in the growth rate. Do you think it was the right decision?

▲The exact effect can only be assessed once enough data is accumulated, but it is true that dining card usage has increased since July. Reviewing the trend of the first round of consumption coupons, which were distributed from July 21, they were used for various items such as restaurants, hospitals, eyewear, and beauty services. While the precise impact is unclear, it is evident that they contributed to the increase in private consumption in the third quarter. However, it will take time to determine whether the effect on consumption improvement will continue and to what extent it has replaced existing consumption.

-How do you think it will affect growth improvement in the fourth quarter?

▲The effect is likely to be more evident in the fourth quarter than in the third. The reason is that, looking at credit card usage trends during the week the second round of consumption coupons was distributed, which was just before the Chuseok holiday, and in the first week of October, the increase rate in October is noticeably higher. Since the first round of consumption coupons has not been fully used up, it is expected to contribute more to consumption in the fourth quarter. However, since the first round amounted to 9.2 trillion won and the second round to 4.5 trillion won, the effect may be lower than the first round.

-By industry, the service sector's contribution is high. Should this be attributed to the consumption coupons?

▲(Changhyun Park, Head of National Income Statistics Team) The contribution of the service sector to growth in the third quarter was 0.7 percentage points. This is the highest since the fourth quarter of 2022, when it was 0.8 percentage points. By industry, wholesale and retail, accommodation, and food services contributed about 0.2 percentage points. The effect of consumption coupons was most evident in the food service sector, and convenience store sales also increased in the retail sector. This can also be seen as an effect of the consumption coupons. However, in addition to this, increased stock-related transactions in the financial and insurance sector and increased fund subscriptions also contributed to growth.

-Exports continued to increase, but the growth rate slowed. How do you assess this?

▲The contribution to growth in the second quarter was 2.0 percentage points, which is extremely high. In the third quarter, the contribution was 0.7 percentage points, which is still solid despite the high growth in the second quarter. This was largely due to semiconductors, but for automobiles, while exports to the United States decreased, local production in the U.S. increased significantly. Since increased local production generates operating profit, which is recorded as income balance, it is negative for GDP but positive for GNI. Although automobile exports to the U.S. decreased, exports of electric vehicles to the European Union increased, and used car exports to Central Asia also rose significantly. In the case of the petroleum refining industry, which had been facing global oversupply, recent shutdowns at major refining facilities have eased the oversupply, resulting in a positive effect. Not only semiconductors but also these corporate efforts should be closely watched to see how much they are reflected in the fourth quarter.

-Government consumption increased by 1.2%. How do you evaluate this figure, considering the expansionary fiscal stance and efforts for early execution?

▲The new government's proactive fiscal execution stance is fundamentally in place. There was also construction investment spending related to the Asia-Pacific Economic Cooperation (APEC) summit. Related material expenses also had an impact in the third quarter. In addition, with the return of resident doctors in September, the patient capacity of general hospitals increased significantly, leading to higher health insurance benefit payments. Increased government spending related to the supplementary budget also had an effect.

-How long do you think the sluggishness in construction investment will continue? When will the effects of the September 7 supply measures be reflected in the real economy?

▲Construction investment has clearly constrained growth so far, but this time it played a neutral role. The possibility of prolonged sluggishness remains a downside risk. On the positive side, construction orders have been increasing since June, suggesting that social overhead capital (SOC) execution could rise next year. In addition, factors such as factory construction may also serve as upside factors, so it is necessary to monitor the overall situation.

-The stock market is booming and housing prices have risen. How do you think these asset increases have affected the recovery of economic sentiment?

▲Private consumption has expanded significantly due to a mix of four factors. First, there is a clear sentiment improvement effect from asset increases. Second, government policy is not limited to consumption coupons; the electric vehicle subsidy policy has also changed. Third, the launch of new products such as smartphones and electric vehicles has had an effect. Lastly, the normalization of general hospital functions due to the return of resident doctors has led to increased medical consumption. These factors have contributed to the rise in private consumption.

▲Although consumer sentiment declined for two consecutive months in September and October, it remains at a high level, so it is difficult to say that sentiment has turned downward. The fourth quarter is also expected to follow the trend of the third quarter.

-What variables could affect growth in the fourth quarter?

▲There are three points to watch closely. First, despite the impact of U.S. tariffs, exports are holding up well due to strong semiconductor exports, but also because Korean companies are increasing exports to other countries for items subject to tariffs. Whether this effect continues into the fourth quarter is important. Second, while consumer sentiment is expected to remain solid, the effect of the second round of consumption coupons is likely to be less than the first, so whether the effect continues is a point to watch. This will also be relevant next year. Third, construction investment did not drag down growth this quarter, but there is a possibility of prolonged structural sluggishness, including cases where construction is halted due to safety accidents. Observing how this affects growth will help in assessing the fourth quarter.