South Korea grows 1% in a quarter on chips, but households cut back

What happened

South Korea’s economy grew 1.0% in July to September compared with the previous three months, the Bank of Korea said on 27 October. That was faster than the 0.6% of the second quarter and above the 0.8% that economists surveyed by Bloomberg had expected. Compared with a year earlier, output was 3.4% higher.

The growth came from companies, the government and exports. Spending on machinery and equipment, called facility investment, rose 4.1%. Government spending rose 1.9%. Exports grew 2.3%, as demand for chips used in artificial intelligence stayed strong.

Households went the other way. Private consumption fell 0.2%, with less spent on cars, home appliances, restaurants and financial services. Services output barely grew.

Why the mix of growth matters

GDP adds up four kinds of spending: households, companies’ investment, government, and exports minus imports. The total can rise even when one part shrinks, as long as the others grow faster. That is what happened here: domestic demand added about 0.9 percentage point to growth, and net exports 0.1 point, even though households pulled back.

The mix tells you how widely the gains are shared. Chip exports bring money into the country. Real gross domestic income, which also counts how much more Korea’s exports can buy abroad, rose 18.8% from a year earlier, the fastest since 1977. Tax revenue is rising too. But households are not yet spending it. Economists point to higher borrowing costs after two rate rises, a recent fall in share prices and weak hiring.

Why the central bank is watching households

The Bank of Korea raised its base rate in July and August, to 3.00%, and held it there on 22 October. Inflation was 2.9% in September, and 2.8% excluding food and energy, both above its 2% target.

Strong growth argues for raising rates again. But interest rates work mainly through households and domestic borrowing, not through chip exports sold abroad. If consumers are already cutting back, a further rise would add to the squeeze on the part of the economy that is weakest, while doing little to slow the part that is booming. That trade-off is what the bank has to weigh.

Where it sits in the chain

This is Link 5, the real economy, feeding back into Link 2, the central bank. The bank said it expects growth this year and next to be considerably higher than it projected in August, and economists expect a close debate over another rise at its November meeting.

What to watch

• October inflation, due in early November.
• Monthly retail sales, for signs that household spending is recovering or falling further.
• The Bank of Korea’s next decision and new forecasts on 26 November.