(Bloomberg) -- South Korea’s economic growth accelerated to a pace faster than the most optimistic forecasts last quarter, dimming prospects for a near-term interest-rate cut and offering belated relief to President Yoon Suk Yeol after an election setback that threatens his policy initiatives.

Gross domestic product advanced 1.3% in the three months through March versus the previous quarter, the Bank of Korea said Thursday, an advance that soundly outpaced economists’ consensus for a 0.6% expansion. The highest estimate was 0.9%.

The economy grew 3.4% year on year, beating the forecast of 2.5%.

The faster-than-expected expansion reinforces the view among policymakers that South Korea’s economy will grow more than 2% this year. Global demand for technology products such as semiconductors has been a key driver, while momentum is starting to broaden to other industries. Growth in exports sped up to 8.3% in the first quarter from 5.7% in the previous period, according to Hyosung Kwon at Bloomberg Economics.

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Construction investment returned to growth in the first quarter after a 4.5% contraction in the previous three-month period. The government said in February that it would accelerate the implementation of infrastructure projects and public-private partnerships to shore up the industry, where activity has been hurt by credit risks.

“It’s a surprise, with exports mostly driving the recovery while domestic spending slowly improves,” said Kwon Young Sun, chief economist at Woori Finance Research Institute. The numbers provide the central bank with fresh incentive to take some time before conducting any interest-rate cuts, especially at a time when the won has weakened against the dollar, he said.

From the previous quarter, private consumption rose 0.8%, while government spending was up 0.7%. Exports in real terms increased 0.9%, as facilities investment fell 0.8%, according to the BOK.

Manufacturing output increased 1.2% from the previous quarter with chemical products and transportation equipment leading the activity. Public works and building construction played a central role in boosting the construction industry that grew 4.8% in the first quarter, the central bank said.

What Bloomberg Economics Says...

“The unexpectedly sharp rise in South Korea’s GDP in the first quarter shows the economy is more resilient than anticipated to the Bank of Korea’s restrictive stance. This could lead the BOK to re-consider its strategy to temper heated inflation — keeping rates high for longer and stepping up its hawkish talk. ”

— Hyosung Kwon, economist

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Risks remain for the economic outlook. Central banks around the world have kept interest rates elevated to tame inflation, and Middle-East tensions are flaring up. South Korea’s currency briefly weakened to the key psychological level of 1,400 won per dollar last week, prompting warnings of intervention from policymakers.

Read more: South Korea Issues Rare Warning After Won Hits 1,400 Per Dollar

Debt concerns continue to cast a shadow over the construction industry and consumers are tightening their budgets as they cope with persistent price pressures.

“The data offer encouraging signs that the worst might be over for consumption in Korea but with the labour market weakening and debt service burdens likely to remain high, we aren’t convinced that today’s data mark the start of a strong recovery,” Shivaan Tandon, an economist at Capital Economics, said in a note.

Government spending has also slowed compared with the pandemic era when stimulus helped tide the economy over. Yoon has sought to restore fiscal health by exercising restraint since taking office in 2022.

That policy stance faces pressure in the wake of parliamentary elections earlier this month that resulted in a drubbing for his People Power Party. Lee Jae-myung of the opposition Democratic Party has called for fiscal stimulus, including handouts worth about 200 dollars for each citizen. Thursday’s robust data may ease that pressure.

“Authorities can heave a sigh of relief for now as private spending shows resilience,” An Young-jin, an economist at SK Securities, said. “The government still has the lead on policy.”

The electoral defeat also threatened Yoon’s efforts to reduce wealth taxes and buttress relations with the US and Japan during the remainder of his tenure that ends in 2027. Yoon has made stronger economic and technology ties with the US a centerpiece of his administration.

The trend in worldwide trade bodes well for South Korea, with the World Trade Organization expecting a gradual recovery in the early months of 2024. “But any gains could be easily derailed by regional conflicts and geopolitical tensions,” the global organization said last month.

China will play a key role for its neighbor. The nation remains South Korea’s biggest trading partner, with its exports to the world’s second-largest economy rising 9% from a year earlier for the first 20 days of April. South Korea’s shipments to the US rose 22.8%, while those to Vietnam increased 26.6%.

There are signs the situation in China is improving. Its manufacturing activity expanded in March for the first time since September, while GDP figures for the first quarter soundly beat expectations, with the nation targeting about 5% growth for the year. Still, growth was mostly driven by public investment, with private demand remaining fragile.

As South Korea’s economic growth accelerates, it can provide more scope for the central bank to keep its benchmark rate restrictive for longer. Keeping its focus on inflation, the BOK held the rate steady for a 10th time earlier this month.

“Part of the reason is the economic recovery so far — powered by external demand — has remained remarkably strong even with restrictive levels of interest rates,” Kelvin Lam, a Pantheon Macroeconomics economist, said in a note. 

The BOK may now revise its 2024 growth forecast to 2.3% from 2.1% when the board meets for a rate decision in May, Bloomberg’s Kwon said. If that happens, the central bank is likely to start its policy pivot in the fourth quarter rather than the third, he said.

(Adds chart, details and economists’ comments)

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