"Third-quarter gross domestic product (GDP) can be described as the new administration's first full economic report card."
The Ministry of Economy and Finance said this at an on-background briefing on recent economic trends held at the Government Complex Sejong on the 28th. Kim Jae-hoon, Director General for Economic Stabilization at the Ministry of Economy and Finance (MOEF), added, "It showed the highest level of growth in six quarters since the first quarter of 2024." Third-quarter GDP grew 1.2% from the previous quarter.
From the second quarter of last year to the first quarter of this year, GDP increased around 0% consecutively. Growth around 0% for four straight quarters was unprecedented. In particular, the first quarter of this year contracted 0.2% as consumer sentiment slumped sharply, and the Ministry of Economy and Finance (MOEF) analyzed the reason as "consumer sentiment was severely depressed due to the fallout from martial law."
It was the first time in three quarters since the fourth quarter of last year that the Ministry of Economy and Finance (MOEF) held an on-background briefing focused on the GDP growth rate. Announcing GDP figures to the market is the role of the Bank of Korea (BOK). However, when the first-quarter GDP growth rate last year delivered a surprise 1.3% increase from the previous quarter, the ministry held a separate on-background briefing from the BOK.
As GDP growth rates in the second quarter (-0.2%), third quarter (+0.1%), and fourth quarter (+0.1%) of last year underwhelmed, the Ministry of Economy and Finance (MOEF) downgraded the briefer from Director General to Director and proceeded with the announcements. Even that was tentatively halted this year. That is because first-quarter GDP this year contracted 0.2%, and the second quarter posted only 0.6% growth, below the potential growth rate (about 2%). Only in the third quarter did the ministry hold its first GDP on-background briefing of the year.
◇ Consumption with livelihood coupons counted as private, not government
The Ministry of Economy and Finance (MOEF) viewed this quarter's GDP growth as driven by domestic demand and the private sector. Of the 1.2% growth rate, the ministry analyzed the private contribution as 0.8 percentage points (p) and the government contribution as 0.4 p. The basis was solid private consumption, facility investment, and construction investment. Compared with the previous quarter, private consumption rose 1.3% and facility investment 2.4%, while construction investment fell 0.1%. Although construction investment was negative, it showed signs of exiting a slump compared with the first quarter (-3.1%) and the second quarter (-1.2%) of this year.
However, it is hard to see this entirely as domestic demand and private-sector driven. The livelihood recovery consumption coupons distributed to all citizens in amounts from 150,000 to 520,000 won were classified in this analysis as private consumption, not government expenditure. The government spent about 13.5 trillion won to issue the livelihood recovery consumption coupons.
On this point, Myeongji University Professor Woo Seok-jin said, "The increase in private consumption is the effect of (government) transfer expenditure," adding, "Transfer expenditure is when (the government) gives money to a household and (the household) spends it." Asked whether "since the livelihood recovery consumption coupons were included in the private contribution, isn't this closer to government-led growth," Kim, the Director General, said, "The impact of improved consumer sentiment and stock market revitalization on actual consumption was significant," adding, "There was also a new smartphone launch in the third quarter."
However, the Ministry of Economy and Finance (MOEF) said it cannot analyze the extent to which the livelihood recovery consumption coupons primed consumption. Kim, the Director General, said, "It is difficult to calculate a multiplier for the coupons alone," adding, "(The coupons) contributed substantially to creating new consumption rather than crowding out existing consumption."
To achieve an annual economic growth rate of 1% or higher, fourth-quarter GDP must come in at at least -0.1% or better. Kim, the Director General, explained, "We are not considering 0.8% (as this year's annual growth rate figure)," adding, "If the fourth-quarter result is between -0.1% and 0.3% on a quarter-over-quarter basis, the annual (growth rate) will be 1.0%."
The government is forecasting next year's economic growth rate at 1.8%. However, this figure could change in the Economic Policy Direction announcement at the end of this year or early next year. The Ministry of Economy and Finance (MOEF) said, "We will do our utmost to bolster growth potential through an artificial intelligence (AI) grand transition, a super-innovation economy leading project, and productive finance."
◇ Concerns over a "4,000-P" bubble, MOEF says it is a "normalization process"
At the on-background briefing, the Ministry of Economy and Finance (MOEF) also said the policy effect helped the KOSPI reach 4,000 points the previous day, alongside third-quarter GDP. Kim, the Director General, said, "Since the new administration took office, policy effects such as amending the Commercial Act and a one-strike-out for unfair trading have contributed (to the rise in the KOSPI)," adding, "Real aspects of our economy, such as an improvement in the semiconductor cycle, also supported the index."
The KOSPI has risen about 66% from the start of the year to the day, ranking first in gains among global stock markets. It far outpaced the Japanese Nikkei (27.53%), the U.S. Nasdaq (22.60%), Taiwan's Taiex (22.43%), and the Standard & Poor's (S&P) 500 (17.15%), which are also considered to have risen sharply.
Because of this, some have voiced concerns that the stock market may be overheating. Lee Kyung-min, a researcher at Daishin Securities Co., said, "A major uptrend is likely to continue into next year, but it is true there is market pressure from the rapid rise in a short period," adding, "The price-to-book ratio (PBR) has surpassed the 2021 peak, and the gaps with the 120-day and 200-day moving averages (the deviation between prices and moving averages) have also reached their 2021 peaks."
However, the Ministry of Economy and Finance (MOEF) assessed that the domestic stock market is in a normalization process. Kim, the Director General, said, "The price-to-book ratio (PBR) and price-earnings ratio (PER) are still low compared to overseas," adding, "Major investment banks (IB) also continue to see attractive valuations in the domestic market." As of the previous day, the KOSPI's PBR was 1.32 times and PER 18.37 times, lower than the averages of advanced economies (PBR 3.95 times, PER 24.46 times).
The Ministry of Economy and Finance (MOEF) also cited the foreign equity ratio as evidence it is not a bubble. The current foreign equity ratio is 34.9%, below the previous high (36.1% on July 10, 2024) as well as the long-term average (35.0%). Kim, the Director General, said, "Unlike in the past, because the market is being led by foreigners rather than individuals, the uptrend appears quite sustainable."
The Ministry of Economy and Finance (MOEF) also believes the current market conditions are having a positive effect on GDP. Kim, the Director General, said, "According to a 2019 Bank of Korea (BOK) study, when the KOSPI rises 1%, private consumption in the same quarter increases 0.06%."