South Korea’s economy posted surprisingly weak growth in the third quarter, as exports declined due to cooling demand from major markets like China, while construction investment plummeted amid a persistent slump in the domestic real estate market, according to official estimates from the central bank.

Disappointing growth and slowing inflation typically point to a need for loosening in monetary policy to support the economy. However, most analysts predict the Bank of Korea will not lower interest rates further this year, mainly because of concerns about apartment prices and the strength in household borrowing.

According to the Bank of Korea’s advance estimates, released late last week, South Korea’s economy grew only 0.1 percent in the July-September period from the previous quarter in real terms. This was much lower than the 0.5 percent increase in gross domestic product forecast by analysts and the central bank itself in August.

In addition, this follows a 0.2 percent drop in gross domestic product in the preceding quarter, allowing South Korea’s economy to narrowly avoid a technical recession -- defined as two consecutive quarters of contraction. The last time the economy was in recession was in early 2020, during the onset of the COVID-19 pandemic.

However, this 0.1 percent growth means the economy has not yet recovered from the contraction of the second quarter, with economic output still below levels seen in the first quarter of this year. Notably, central bank data shows that without growth in inventory, the economy would have contracted again in the July-September period.

This weak growth is a red flag for Asia’s fourth-largest economy to achieve its goal of 2.4 percent growth for the entire year amid global uncertainties surrounding the semiconductor market, a key export for the country. The Bank of Korea indicated that the economy would need to grow 1.2 percent in the fourth quarter to achieve the 2.4 percent target – a pace widely seen as almost impossible to achieve.

Despite the sustained economic slowdown and cooling inflation in recent months, most analysts expect the Bank of Korea to hold off on another rate cut at its meeting later this month, following its first rate reduction in years in October.

This expectation is supported by comments from the Bank of Korea’s monetary policy board during a news conference on Oct. 11. Gov. Rhee Chang-yong noted that five of the six board members favored maintaining the policy interest rate at 3.25 percent for the next three months to monitor the effects on housing prices, household debt and global geopolitical developments.

This suggests that the Bank of Korea’s policy will remain influenced by housing prices and household debt, when excluding external political factors. Additionally, the central bank is cautious about lowering interest rates further due to the potential downward pressure on the won, but the currency had already been weak due to factors other than the monetary policy.

It is also questionable that the monetary policy of an economy as large as South Korea’s should be so heavily influenced by factors like apartment prices and household debt. This reliance on monetary policy can also limit the efficiency of economic management, as such policy is a broad tool that affects all sectors of the economy indiscriminately.

Apartment prices, for example, are shaped not only by interest rates but by a complex set of factors, including housing supply and demand, political circumstances and the patterns in capital allocation in many countries.

Current housing price trends may not be a direct result of present interest rates, but could reflect long-term borrowing cost trends as well as other economic and noneconomic conditions. Furthermore, rising housing prices are currently limited to certain areas in Seoul and its surrounding cities, not nationwide.

Data from international organizations like the Bank for International Settlements indicates that South Korea’s overall housing prices are not increasing at an alarming rate compared to other advanced and emerging economies.

Statistics from the Korea Real Estate Board also show that apartment prices across the country rose just 0.3 percent in September from a year earlier, marking only the fifth month with year-over-year increases. This limited growth follows 19 months of uninterrupted price declines.

This modest growth is largely confined to the capital region, with apartment prices outside that area dropping 1.2 percent year-over-year in September, marking the 22nd consecutive month of declines in these regions.

Household borrowing, closely watched by the Bank of Korea as the major indicator of financial stability, is not solely influenced by apartment prices. The Bank of Korea Act emphasizes that while financial stability is important, inflation remains the key determinant for monetary policy.

When the Bank of Korea cut its policy interest rate by 25 basis points in October for the first time in many years and only after the US Federal Reserve lowered its policy rate target by a bigger margin, many analysts felt it was overdue, given the deepening slump in domestic demand.

Delaying rate cuts due to secondary factors could mean the Bank of Korea will fall farther behind the curve, potentially increasing the cost of addressing the problems later on.

Yoo Choon-sik

Yoo Choon-sik worked for nearly 30 years at Reuters, including as the chief Korea economics correspondent, and briefly worked as a business strategy consultant. The views expressed here are the writer’s own. -- Ed.