S. Korea’s Economy Grows More Than Forecast as Exports Climb

South Korea’s economy expanded at a faster pace than forecast, showing momentum that could boost inflation pressures and build a case for a rate increase.

Gross domestic product grew 0.9 percent in January-March period from the previous quarter, the Bank of Korea said today in a statement in Seoul, above the median 0.8 percent estimate of 13 economists surveyed by Bloomberg News. From a year earlier, GDP increased 3.9 percent, the most in three years.

Exports weathered the won’s 8 percent climb against the dollar over the past year and private consumption increased, indicating households are coping with record debt. The central bank, which is monitoring any economic effects of last week’s ferry disaster, forecasts growth will accelerate to the quickest pace this year since 2010, helping push inflation up to its target band.

“The economy is doing well broadly, across exports, consumption and jobs,” said Lee Chul Hee, a Seoul-based economist at Tongyang Securities Inc, although the ferry disaster may damp consumer sentiment temporarily. “Inflation will rise to near 3 percent later this year,” prompting an interest rate increase by the first quarter of next year at the latest, he said.

The won rose 0.1 percent to 1038.25 against the dollar as of 11:00 a.m. in Seoul, while the Kospi Index was down 0.2 percent.

Rising Exports

Electronics and petrochemical products led a 1.7 percent increase in the nation’s exports from the previous quarter. Private consumption rose 0.3 percent on higher expenditures on durables such as automobiles.

Growth was constrained by weakness in business investment, with spending on facilities dropping 1.3 percent. Government expenditure fell 0.2 percent. The pace of overall GDP expansion matched the gain in the final quarter of last year.

The BOK raised its 2014 growth forecast to 4 percent from 3.8 percent projected in January and projected a 4.2 percent expansion for next year, after leaving its key rate unchanged at its April 10 meeting, the first under Governor Lee Ju Yeol.

Growth will pick up to near potential and inflation -- at 1.3 percent in March -- will rise into the BOK’s target range of 2.5 percent to 3.5 percent this year, even as weakness in emerging economies and monetary tapering by the U.S. Federal Reserve pose risks, Lee said on April 10.

The central bank may consider lifting its policy rate when demand starts to drive consumer price pressures, Lee said.

‘Hawkish’ Governor

The governor’s “hawkish” remarks prompted Goldman Sachs Group Inc. economist Kwon Goohoon to drop his call for a rate cut and instead forecast the central bank would remain on hold this year.

The BOK will raise its policy rate to 2.75 percent by the first quarter of next year, according to the median of 26 economists surveyed by Bloomberg News.

Growth is on the track projected by the central bank, BOK Director General Jung Yung Taek told reporters in Seoul after the data was released. The central bank will closely watch for any impact from the ferry sinking on consumption and the economy, he said.

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