South Korea's GDP grows 1.0% in Q3, driven by semiconductors

What happened

South Korea's economy expanded by 1.0% in the third quarter (July-September) compared to the previous quarter, according to data released by the Bank of Korea. This result surpassed the average forecast of 0.89% from economists surveyed by Infomax and represents an acceleration from the 0.6% growth recorded in the second quarter and 1.8% in the first quarter of the year.

The advance was primarily driven by the technology sector, with a particular emphasis on semiconductor exports, machinery, and electrical equipment, which saw a 2.3% increase. Investment in facilities also performed positively, rising 4.1% with the addition of new equipment for chip manufacturing.

On the other hand, private consumption saw a contraction of 0.2%, as households reduced their spending on goods and services. In contrast, government consumption grew by 1.9%. South Korean authorities have expressed concerns about inflation, which remains around 3%, and the increasing household debt.

Why it matters

The GDP results demonstrate the resilience of the South Korean economy, especially in its technology sector, which is crucial for the global economy. Strong demand for semiconductors, linked to the advancement of artificial intelligence, supports export and investment growth. However, the decline in private consumption is a warning sign, indicating that high interest rates and inflation may be impacting household purchasing power. The dichotomy between the robust performance of the technology sector and the weakness in domestic consumption presents a challenge for monetary authorities.

Market impact

• Interest rates and bonds: The Bank of Korea maintained its base interest rate at 3.0% in its last meeting, but persistent inflation and the strong GDP performance could lead to another increase in the next meeting in November. This tends to put upward pressure on bond yields. Weak consumption, however, might create hesitation in the monetary tightening cycle.
• Dollar and currency: The strength of the South Korean economy and the prospect of higher interest rates could offer some support to the South Korean won against the dollar. However, global uncertainty and weak domestic consumption might limit gains.
• Equities: The South Korean stock market may benefit from the performance of technology and semiconductor companies like Samsung Electronics and SK Hynix. Nevertheless, the decline in private consumption and the higher interest rate environment could weigh on other sectors.
• Commodities: Increased semiconductor production could boost demand for specific raw materials used in their manufacturing.
• Brazil: The direct impact is limited. However, a stronger global economy, driven by technology sectors, could have indirect positive effects on Brazilian commodity exports if global demand for goods and services increases.

What to watch

• The Bank of Korea's next monetary policy decision in November to assess the possibility of an interest rate hike.
• The release of inflation and private consumption data in the coming quarters to see if the downward trend continues or reverses.
• The performance of semiconductor and other technology exports.
• Analyst comments on financial stability risks, such as the real estate market and household debt.

Scenarios

• Base Case: The semiconductor sector continues to drive growth, while the Bank of Korea gradually raises interest rates to control inflation, with private consumption showing slow signs of recovery.
• Downside Case: Inflation proves more persistent, forcing the Bank of Korea to aggressively raise interest rates, which could lead to a sharper slowdown in consumption and financial stability risks.

Original source: Valor Econômico. For information only, not investment advice.