South Korea Q4 GDP growth meets forecast on domestic demand

South Korea's economy grew a seasonally adjusted 0.9 percent in the fourth quarter over the previous three months as capital investment grew at the fastest pace in nearly two years, meeting market expectations and boosting growth prospects for 2014.

The median forecast from a Reuters survey of 15 analysts was for Asia's fourth-largest economy to expand by 0.9 percent in the three months to December, following growth of 1.1 percent in both the second and third quarter of 2013.

(Read more: South Korea data equals merry Christmas shopping?)

While a contraction in construction investment led to slower overall growth in the fourth quarter, capital investment during the October-December period grew by a seasonally adjusted 6.4 percent from the previous quarter to mark the fastest expansion since the first quarter of 2012 and suggested firm economic momentum for the coming quarters.

Private consumption also grew by a seasonally adjusted 0.9 percent last quarter in sequential terms, in line with a 1.0 percent expansion seen in the previous period and bolstering policymakers' expectations that domestic demand will do more heavy lifting this year.

Yeouido finance district in Seoul, South Korea.
Getty Images

Over a year earlier, gross domestic product for the fourth quarter was 3.9 percent higher, marking the strongest pickup since the first quarter of 2011. This compared with a 3.3 percent gain in the third quarter and a median 4.0 percent rise tipped in the Reuters survey.

Growth for the whole of 2013 quickened to 2.8 percent from 2.0 percent in 2012, the estimate showed, while the Bank of Korea has forecast growth would further pick up to 3.8 percent this year.

"Today's figures support our view that Korea remains on track for a gradual export-led recovery," said Ronald Man, a Hong Kong-based economist for HSBC.

(Read more: South Korea ramps up forex reserves to record high)

"Trade strengthened in the final few months of last year as global economic conditions improved. That said, uncertainty surrounding yen weakness may weigh on sentiment."

Analysts and policy makers see the trade-reliant economy humming nicely this year, spurred by improving exports and a more sure-footed recovery in developed nations.

The growth uptick in the United States is seen underpinning activity in South Korea, home to global manufacturing giants such as Samsung Electronics and Hyundai Motor.

Is South Korea the right scene for multinationals?

The government expects exports, which grew 2.1 percent last year, to accelerate to 6.4 percent this year.

The International Monetary Fund raised its global growth forecast for the first time in nearly two years on Tuesday, saying fading economic headwinds should permit advanced nations to pick up the mantle of growth from emerging markets.

South Korea's rosy outlook for this year is partly predicated on private consumption doing more of the heavy lifting, especially as government spending is forecast to grow at a slower rate of 2 percent this year from a 7-plus percent rise in 2013.

The central bank expects private consumption to grow 3.4 percent this year, accelerating from a 1.9 percent rise in 2013 due to continued jobs growth and subdued price pressures.

(Read more: South Korea central bank cuts growth outlook, eyes US impasse)

Still, subdued consumer spending points to some bumps in South Korea's growth-recovery story. Consumers remain reluctant to open their wallets given a sizable household debt burden.

The ratio of local household gross debt to gross disposable income was at 153.4 in 2012, well above the Organisation for Economic Co-operation and Development average of 121.3.

Analysts say the central bank may be more inclined to keep interest rates low for longer to help drive consumption, with market consensus suggesting interest rates will only start rising towards the end of the year.