Credit Herald

South Korea’s economy expanded in the third quarter at the fastest pace in seven years, stoking speculation the central bank will raise borrowing costs.

Gross domestic product increased 2.9 percent from the second quarter, when it expanded 2.6 percent, the central bank said in Seoul today. That was the fastest pace since the first quarter of 2002 and compared with a median estimate of 1.9 percent growth in a Bloomberg News survey. From a year earlier, GDP rose 0.6 percent.

South Korea has led a regional rebound with China and Singapore as companies including Hyundai Motor Co. and Samsung Electronics Co. reported surging profits, boosted by exports. The central bank cut interest rates to a record-low 2 percent while the government frontloaded spending this year to try to cushion the economy from the global recession.

“The bigger-than-expected GDP number definitely adds more weight for an interest rate increase,” said Go You Sun, an economist at Daewoo Securities Co. in Seoul, who had previously forecast the central bank to raise rates early in 2010. “The number today made a clear basis for the Bank of Korea to justify a rate increase,” she said.

Hyundai, South Korea’s largest automaker, posted record third-quarter net income of 979.2 billion won ($827 million). Hynix Semiconductor Inc., the world’s second-largest computer- memory chipmaker, on Oct. 23 reported its first quarterly profit in two years on higher prices.

Stocks, Currency

The nation’s Kospi stock index has surged 46 percent this year and the won gained 5.5 percent against the dollar in the past three months as investors bet the economy is past the worst of the global economic slowdown.

The strengthening economy has fueled expectations the central bank will raise rates as early as its next review of borrowing costs on Nov. 12. That would be the first increase since August 2008.

“The Bank of Korea has said it may raise interest rates and that there’s no possibility of a double-dip recession,” said Oh Suk Tae, an economist at SC First Bank Korea Ltd. in Seoul. “With the good economic growth numbers, a rate hike is more likely.”

Exports gained 5.1 percent in the third quarter from the previous three months, when they rose 14.7 percent, today’s report showed. Corporate investment in factories and equipment climbed 8.9 percent, compared with a 10.1 percent in the second quarter.

Private Consumption

Private consumption advanced 1.4 percent from the second quarter. Government spending fell 0.8 percent and construction investment dropped 2.1 percent.

Kia Motors Corp., South Korea’s second-biggest automaker, posted record profit in the three months to Sept. 30 as global stimulus measures boosted demand for cars and the weaker won buoyed export earnings. 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.

To prevent the economy from sliding into a recession, the central bank cut the benchmark interest rate by 3.25 percentage points between October and February to 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 says he shares that view.

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 expanded 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 government has said an unwinding of expansionary policies would be “premature,” while Governor Lee said last week keeping rates at a record-low for too long isn’t healthy for the economy. Low interest rates have spurred consumer borrowing, with bank lending to households expanding for a seventh straight month in August before falling in September.

“I don’t think keeping rates too low for too long is good,” Lee told lawmakers at a parliamentary audit on Oct. 23. He said earlier this month a rate increase will be “more than” the usual 25-basis-point move.

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