Seoul: The South Korean economy witnessed a 1.2 percent expansion in the third quarter compared to the previous quarter, primarily driven by an increase in consumer spending and robust export performance. This growth rate surpasses the 1.1 percent forecasted by the Bank of Korea in August and marks the fastest growth in a year and a half.
According to Yonhap News Agency, the economy had previously stagnated around a zero percent growth rate for four consecutive quarters after achieving a 1.2 percent growth in the first quarter of 2024. Concerns had been mounting that the annual growth might hover around zero percent. However, the third quarter's stronger-than-expected performance has brought a more optimistic outlook, with government officials cautiously predicting that annual growth could reach the one percent range.
A significant factor in the third quarter's "surprise" growth was domestic demand, with private consumption increasing by 1.3 percent, the highest since the third quarter of 2022. Analysts attribute this improvement in consumer sentiment to the government's distribution of 13.7 trillion won (US$9.55 billion) in consumption coupons. Additionally, government spending saw a 1.2 percent increase.
Despite challenges posed by global trade protectionism, South Korean exports recorded a 1.5 percent increase. Automakers, facing high US tariffs, successfully targeted Europe and the Middle East as alternative markets. However, not all sectors fared well; construction investment declined by 0.1 percent for the sixth consecutive quarter, leading to substantial job losses. The Ministry of Data and Statistics reported significant employment reductions in construction and retail sectors, with 69,000 jobs lost in building construction and 4,000 in dining and retail industries in the first half.
The business outlook remains stagnant, with the Business Survey Index for November standing at 94.8, below the baseline of 100. This marks a negative business sentiment for three years and eight months. While some economic indicators are positive, concerns persist that the current growth might be short-lived.
The impact of the consumption coupons, which substantially contributed to the third quarter's growth, is diminishing. The government distributed 9.2 trillion won in July and 4.5 trillion won in September, with the effects of September's payments expected to reflect in the fourth quarter. However, further distribution of coupons seems unlikely due to fiscal constraints. The government already increased spending through a 13.8 trillion won supplementary budget in May and a 31.8 trillion won extra budget in July, resulting in a managed fiscal balance deficit of 88 trillion won as of late August.
To sustain growth, private demand must remain robust even as the effect of the coupons fades. Yet, consumer sentiment is under pressure from rising living costs, including grocery and restaurant prices. Household debt remains a concern, and there is apprehension that lowering interest rates might lead to a surge in housing prices. Inconsistent housing policies have also added to the uncertainty. Comprehensive measures to boost demand are needed.
While cash stimulus like consumption coupons offers temporary relief, the focus now should be on structural reforms and productivity enhancements. Easing constraints on corporate activities, such as rigid workweeks and excessive labor rights, is necessary. Restructuring stagnant industries and supporting emerging fields can help rejuvenate corporate vigor, subsequently increasing jobs and incomes. This could foster a virtuous cycle of consumption and investment, highlighting the limitations of relying solely on fiscal injections for sustainable growth.