South Korea's Q3 Economic Recovery: Export-Led Expansion and Domestic Demand Resilience

South Korea's economy, the world's 12th largest, has shown signs of recovery in the third quarter of 2024, with a return to growth driven by an export-led expansion and resilient domestic demand. A Reuters poll of 23 economists found that Asia's fourth-largest economy likely grew a seasonally adjusted 0.5% in the third quarter, following a mild contraction in the previous quarter.

The export-led expansion played a significant role in South Korea's Q3 economic growth. South Korea's monthly exports have grown by almost 10% this year on average up to September, largely driven by semiconductor demand from the United States. This robust export performance helped the trade-dependent economy avoid a technical recession, defined as two consecutive quarters of contraction.

However, the pace of export growth has cooled in recent months as trade moderated with key partners such as China, Japan, and India. Despite this, exports remained robust and contributed to the overall economic recovery.

Domestic demand also played a crucial role in South Korea's Q3 economic recovery, despite higher borrowing costs. High borrowing costs have impacted consumer spending, with household debt levels among the highest in the developed world. However, the construction sector rebounded in the third quarter, with the government easing property regulations, and the manufacturing sector expanded on the recovery of the IT industry cycle.

The Bank of Korea (BOK) cut its policy rate by 25 basis points in October from a 15-year high of 3.50%, in a bid to revive ailing demand. This policy rate cut is expected to support the modest rebound in GDP growth and ease the burden of higher borrowing costs on domestic consumption.

Amid an uneven recovery in China and slowing demand from the United States, South Korea's economic growth was expected to average 2.4% this year, aligning with the central bank's downwardly revised forecasts. The semiconductor industry's performance contributed significantly to South Korea's export growth, with increased exports of IT products and semiconductors driving export growth.

In conclusion, South Korea's Q3 economic recovery was driven by an export-led expansion and resilient domestic demand, despite higher borrowing costs. The Bank of Korea's policy rate cut in October is expected to support the modest rebound in GDP growth and ease the burden of higher borrowing costs on domestic consumption. The uneven recovery in China and slowing demand from the United States pose challenges to South Korea's economic performance, but the semiconductor industry's robust performance offers a beacon of hope for the export-driven economy.