BENGALURU (Oct 22): The South Korean economy likely returned to growth last quarter after a mild contraction in the prior quarter thanks to an export-led expansion that offset higher borrowing costs squeezing domestic demand, a Reuters poll found.

After an unexpected 0.2% contraction in the April-June quarter, Asia's fourth-largest economy was projected to have grown a seasonally adjusted 0.5% in the third quarter, according to a median forecast from 23 economists.

On an annual basis, the economy expanded 2.0% last quarter, according to the median forecast of 26 economists polled on Oct 15-21, down from 2.3% in the previous quarter.

"We expect...3Q GDP data to show lacklustre growth. While exports remained robust, sluggish domestic demand, as reflected by various high-frequency indicators, including retail sales and construction, was a drag," said Khoon Goh, the head of Asia research at ANZ.

South Korea's monthly exports have grown by almost 10% this year on average up to September, largely driven by semiconductor demand from the US, helping the trade-dependent economy avoid a technical recession commonly defined as two consecutive quarters of contraction.

However, the pace of export growth has cooled in recent months as trade moderated with China — South Korea's top trading partner — as well as Japan and India.

High borrowing costs are impacting domestic consumption amid household debt levels that are among the highest in the developed world.

In a bid to revive ailing demand, the Bank of Korea (BOK) cut its policy rate by 25 basis points this month from a 15-year high of 3.50%.

However, the BOK is expected to maintain its current stance for the rest of the year and only cut 50 basis points next year, while the US Federal Reserve is expected to reduce rates by 150 basis points by end-2025, according to separate Reuters polls.

"A modest rebound in GDP growth should support the BOK pivot that we saw at the October meeting, but a back-to-back rate cut in November is unlikely, in our view, given the lingering concerns on the housing market," said Suktae Oh, the chief Korea economist at Societe Generale.

Amid a slowing demand from the US, South Korea's economic growth was expected to average 2.4% this year, aligning with the central bank's downwardly revised forecasts.

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