South Korean Economy Probably Expanded in Third Quarter on Cars

By Seyoon Kim

Oct. 23 (Bloomberg) -- South Korea’s economy probably grew in the third quarter as automakers and electronic goods producers boosted sales in the U.S. and China, and government spending strengthened domestic demand.

Gross domestic product increased 1.9 percent in the three months through September, according to the median forecast of 14 economists surveyed by Bloomberg News. The economy expanded at the fastest pace in almost six years in the second quarter. The report will be released at 8 a.m. in Seoul on Oct. 26.

South Korea has led a regional rebound with China and Singapore as companies including Hyundai Motor Co. and Samsung Electronics Co. reported a surge in profits, driven by overseas sales. The government in Seoul frontloaded spending this year to try to cushion the economy from the global recession and the central bank slashed interest rates to a record-low 2 percent.

“The Korean economy has been performing quite strongly, helped by relatively better exports,” said Oh Suktae, an economist at SC First Bank Korea Ltd. in Seoul. “The effects from an expansionary policy waned in the second half, but despite that, the economy is seeing a gradual pickup.”

Hyundai, South Korea’s largest automaker, yesterday posted record third-quarter net income of 979.2 billion won ($827 million). Samsung Electronics Co., Asia’s biggest maker of chips, flat screens and mobile phones, said earlier this month operating profit more than doubled to as high as 4.3 trillion won in the same period.

Stocks, Currency

The nation’s Kospi stock index has risen 45 percent this year and the won gained 4.8 percent against the dollar in the past three months as investors bet the economy is past the worst of the global slowdown.

To prevent the nation sliding into a recession, the central bank cut the benchmark interest rate by 3.25 percentage points between October and February to the current 2 percent and the government boosted spending.

The Bank of Korea and the government have upgraded their economic forecasts for this year. Finance Minister Yoon Jeung Hyun said early this month the economy is likely to contract less than 1 percent in 2009 and central bank Governor Lee Seong Tae said last week he shares that view.

The International Monetary Fund on Oct. 1 raised its forecast for global economic growth in 2010 to 3.1 percent from a July estimate of 2.5 percent, helped by stimulus packages and demand in Asia.

Regional Rebound

South Korea’s rebound comes as Singapore raised its 2009 economic forecast after gross domestic product expanded for a second consecutive quarter in the three months through September. China’s economy grew at the fastest pace in a year as stimulus spending and record lending growth helped the nation lead the world out of recession.

Sales at South Korea’s major department stores rose in September for a seventh straight month and exports fell at the slowest pace in 11 months in September. Manufacturers’ confidence climbed to the highest level in two years, earlier reports showed.

The pickup in the economy may prompt the central bank to raise interest rates in coming months, according to economists including Chun Chong Woo.

“Strong economic growth in the third quarter justifies an increased likelihood the Bank of Korea will raise rates,” said Chun, of Samsung Securities Co. in Seoul. “The central bank has said it wants to raise rates, as the current settings are more suitable for an emergency and it is waiting for the right timing to move.”

Rate Rises

The government has said an unwinding of expansionary policies would be “premature,” while Governor Lee said last week any future rate increases may be larger than normal.

“It’s difficult to say the increase will be by 0.25 percentage point each time” as was the case in the past, Lee said on Oct. 15. “The central bank will review economic conditions” before deciding how much it will raise rates, he said. “I think it’ll be different from the usual baby step.”

Low interest rates have spurred consumer borrowing, with bank lending to households expanding for a seventh straight month in August before falling in September.

Still, there are also signs the recovery may be somewhat subdued. Finance Minister Yoon said on Oct. 21 that it will be “difficult” for the job market to return to the level seen before the financial crisis.

South Korea’s GDP probably contracted 0.3 percent from a year earlier compared with a 2.2 percent decrease in the second quarter, according to the survey of economists.

To contact the reporter on this story: Seyoon Kim in Seoul at skim7@bloomberg.net