Robust S. Korean GDP raises rate hike prospects

SEOUL: South Korea’s economy clocked its fastest growth in seven years last quarter, as global demand for the country’s electronics more than offset the impact of regional geopolitical strains on trade and boosted expectations for an imminent interest rate rise.

Gross domestic product rose 1.4% in the third quarter from the previous quarter, preliminary numbers from the Bank of Korea showed yesterday, significantly beating the 0.8% forecast in a Reuters survey and marking the biggest jump since a 1.7% spike in the second-quarter of 2010.

Year-on-year growth accelerated to 3.6% in the third quarter from 2.7% in the second quarter, also beating forecasts.

The stellar numbers show Asia’s fourthlargest economy has been able to brush aside the impact of a diplomatic chill between China and South Korea over a US missile defence system and wider concerns about North Korean military provocations.

They have also prompted several analysts to bring forward forecasts for a central bank rate hike.

Kim Doo-un, an economist at Hana Financial Investment Co Ltd, now sees a 25 basis point hike in the bank’s next policy meeting in November.

“This kind of robust growth is surely a rate-hike ingredient,” Kim said. “Shipments out of semiconductors and IT sector in general have been good, and it also seems exports of services also improved in the third quarter.”

The Bank of Korea kept its policy rate unchanged at the record low of 1.25% last week but one dissenting policymaker called for a hike, prompting some speculation that a tightening could take place at the central bank’s next policy meeting on Nov 30.

The third-quarter numbers are likely to bolster this view with growth now on track to hit the central bank’s official forecast of a 3% expansion.

“Even if the economy contracts on-quarter, say by about 0.54% in the fourth quarter, we can achieve 3% expansion this year,” Chung Kyu-il, director general for the Economics Statistics Department at the BoK said on the sidelines of a briefing in Seoul.

The central bank said last week that a row with China over Seoul’s deployment of a US anti-missile system could knock off 0.4 percentage points off the nation’s economic growth this year.

China believes the missile defence system can be used to l ook i nside its territory.

An unofficial Chinese boycott against South Korean consumer products and tourism has hurt some segments of Korea’s economy though shipments of other products such as memory chips remain very strong.

Exports grew 6.1% in the third quarter after declining 2.9% a quarter earlier, while private consumption growth slowed to 0.7% in the July-September period from 1.0%.

Exports, which account for about 40% of GDP, notched a ninth consecutive month of double-digit growth in September in value terms, the longest stretch of such expansion since 2001.

“It has been the semiconductors that mainly boosted production from manufacturing sector, but the third quarter also saw some extra boost from overseas sales of cars and petrochemical products,” Chung said in a briefing.

The outlook for domestic demand is also improving for the year ahead, with the nation’s minimum wage set for its biggest increase in nearly two decades next year.