South Korea’s Economy Picks Up But Still Disappoints

South Korea’s economy was weaker than expected in the third quarter, weighed by lackluster exports, though it improved from the previous quarter helped by strong business investment and improved private consumption.

Asia’s fourth-largest economy picked up 0.1% compared with the previous three months and avoided a technical recession with the growth following the second quarter’s 0.2% contraction.

Preliminary data from the Bank of Korea on Thursday also showed that third-quarter GDP expanded 1.5% compared with the same period a year earlier, slowing from the previous quarter’s 2.3% increase. A Wall Street Journal poll of economists had tipped growth of 2.0% from the prior year and 0.5% from the previous quarter.

The recovery after the mild second-quarter contraction was expected but was still below expectations, ANZ economist Krystal Tan said in a note. She cut her 2024 GDP forecast to 2.2% from 2.5%.

One of the bright spots was private consumption, which picked up 0.5% from the previous quarter after the second-quarter’s 0.2% contraction. Corporate investment in facilities jumped 6.9% from the previous quarter due to higher imports of semiconductor-making equipment and airplanes, following a 1.2% contraction.

The private and corporate spending “was somewhat encouraging as it suggests that the worst is probably over for domestic demand,” Capital Economics markets economist Shivaan Tandon said in a note.

However, exports—a key pillars of the $1.74 trillion economy—were hit by sluggish demand for cars and chemical products. Exports shrank 0.4% from the previous quarter, the first on-quarter pullback since late 2022.

ANZ’s Tan warned that the outlook for exports outside of semiconductor and other artificial intelligence-related sectors was becoming more challenging.

“A robust turnaround in exports does not look to be on the cards,” she said.

The central bank this month cut its key interest rate for the first time in over four years to support the economy. Thursday’s GDP result will reinforce expectations it will keep cutting rates until the end of next year as inflation cools.

The Bank of Korea expects the economy to grow 2.4% and inflation to average 2.5% this year. They are both forecast to slow to 2.1% in 2025.

“The weak third-quarter GDP result is concerning and could lead to South Korea missing the BoK’s 2024 GDP growth target of 2.4%,” Dave Chia, an associate economist at Moody’s Analytics, said in a note.

Write to Kwanwoo Jun at at Kwanwoo.Jun@wsj.com