By Jihoon Lee
SEOUL, Oct 27 (Reuters) - South Korea's economy grew faster than expected in the third quarter as a global AI chip boom boosted exports and investments, advance central bank estimates showed on Tuesday, though domestic demand remained weak.
Gross domestic product expanded 1.0% in the July-September quarter from the preceding three months, when it grew 0.6%. It was stronger than a median 0.7% increase tipped in a Reuters poll of economists.
It was also higher than the Bank of Korea's forecast
of 0.3% in August, when the central bank projected this year's growth at 3.3%. The economy is now seen growing 3.7% this year, if GDP in the fourth quarter stays at the same level as the third quarter.
"It is estimated that about half of economic growth is being driven by semiconductors," Lee Dong-won, director general of the Bank of Korea's economic statistics department, told a briefing.
Exports and investments are expected to remain robust in the fourth quarter, Lee said, adding that chip production volume will expand further next year while prices will continue to grow but at a slower pace.
Private consumption, which fell for the first time in nearly four years in the third quarter, will likely recover gradually, as dividend payouts by chip firms to their shareholders in the fourth quarter and bonus payments to employees in the first quarter of 2027 boost household income, Lee said.
Amid the global boom in AI investment, South Korea's exports topped $800 billion in January to September, higher than last year's full-year record, and are on track to exceed $1 trillion this year, which will make South Korea the fourth country to reach the milestone, after the US, China and Germany.
The Bank of Korea kept interest rates unchanged last week, after back-to-back hikes in July and September, but maintained a hawkish stance by upgrading its economic growth forecasts and remaining upbeat about the country's export momentum.
"Exports and investments are leading growth, but the downside is that private consumption remains weak compared with the overall growth momentum," said Park Sang-hyun, an economist at iM Securities.
"There could be short-term boosts, but it is difficult to expect strong momentum given labour market conditions and restrictive interest rates," Park said.
In a separate central bank survey released on Thursday, consumer sentiment fell slightly in October, as the outlook for household income and consumer spending weakened.
In the third quarter, exports rose 2.3% on demand for semiconductors, machinery and electric equipment, while imports grew 2.4%. Facilities investment jumped 4.1%, led by machinery such as semiconductor manufacturing equipment.
Private consumption fell 0.2% as financial services declined on a stock market slump and car purchases fell due to strikes at major automakers.
On a year-on-year basis, GDP grew 3.4%, after rising 3.7% in the quarter before, also stronger than economists' expectations for a 3.0% increase.
(Reporting by Jihoon Lee; Editing by Nia Williams and Sonali Paul)
