Friday, April 25, 2008

South Korea GDP Growth Slows in Q1 2008

South Korea’s economy grew at its slowest pace in more than three years in the first quarter of 2008 as domestic demand cooled, increasing the prospects of a near-term rate cut by the central bank. The economy expanded 0.7 per cent from the previous quarter, when it grew 1.6 per cent, the Bank of Korea said on Friday. Year on year, growth was 5.7 per cent, euqal to the rate in the previous quarter.

Rising fuel costs combined with a deteriorating outlook for exports prompted companies to reduce investment, while record household debt is sapping consumer buying power.

The near-term outlook does not seem to be too positive with the government expecting exports, which constitute 40 per cent of GDP in what is Asia’s fourth-largest economy, to slow in coming months as the global economy cools.

Domestic demand, which includes private and corporate spending, rose only 0.1 per cent IN Q1 - the slowest pace since the third quarter of 2004 - with growth in private consumption slowing to 0.6 per cent and corporate investment falling 0.1 per cent. Exports increased 12.8 per cent from a year earlier, down from a 17.7 rise the pevious quarter. Real gross domestic income, a measure of purchasing power, fell 2.2 percent from the previous quarter, when it rose 0.3 percent. That's the biggest drop since the fourth quarter of 2000.

Companies are beginning to scale back spending. Investment in new facilities fell 0.1 percent, after a 2.1 percent gain in the fourth quarter. Construction investment dropped 1 percent after a 1.2 percent increase.

The value of South Korea's shipments overseas fell 1.1 percent in the quarter from the previous period as prices for semiconductors declined. From a year earlier exports climbed 12.8 percent. Still, Choi Chun Sin, head of the central bank's statistics department, said that while the central bank expects export growth to slow, overseas shipments would still record "double-digit" growth for the rest of the year. Export climbed 31.5 percent during the first 23 days of April from the same period a year ago.

The outlook has worsened since January, when the Finance Ministry forecast consumer spending and construction investment would replace exports as the main drivers of economic growth. South Korea's jobless rate rose in March as builders and manufacturers shed workers, offering yet another signal that the economy's nine-year expansion is slowing. The number of people employed in the construction sector fell 1.9 percent from a year earlier and employment in manufacturing dropped 0.5 percent.

Unemployment edged up to 3.1 percent from 3 percent in February, the statistics office said today in Gwacheon.

These numbers are expected to add to pressure on the government to introduce measures to boost the economy. Kang Man-soo, finance minister, is quoted as saying this week that it would be difficult for the government to achieve the 7 per cent growth target for this year and stressed the need for a supplementary budget. He is urging the use of about Won4,900bn of tax revenue carried over to this year to build social infrastructure, something lawmakers from the ruling party strongly oppose.

Signs of a slowdown have been emerging as the pace of inflation accelerated to the fastest in more three years and the U.S. housing recession damps global growth.

In March, the leading economic index fell for a third month and the number of new hires declined to a three-year low. Retail sales slowed in February and factory output fell for a second month.

Consumers turned pessimistic for the first time in a year last month and manufacturers' confidence declined from a three- month high.

Meantime, the cost of servicing debt is rising. Lending by South Korean banks to households last month took the level to a record 367 trillion won, and the average lending rate stood at 6.95 percent in February, up from 6.28 percent a year earlier, according to the central bank.

The central bank has kept interest rates at 5 per cent for the past eight months but the BoK governor last month hinted at a rate cut soon, saying he was more worried about a slowing economy than inflation. Inflation hit a 3-year high of 3.9 per cent in March, above the central bank’s target range of 2.5 per cent to 3.5 per cent. The central bank left the seven-day repurchase rate unchanged at 5 percent on April 10. The bank last changed borrowing costs in July and August last year when it made quarter-point increases. Policy makers next meet on May 8 to review rates.

Meantime the won has strengthened, and is heading for its biggest weekly gain in three weeks as a rally in stocks spurred overseas investors to increase holdings of the nation's assets. Bonds are also set for a weekly gain.

The currency strengthened almost 1 percent this week, making it the best performer among the 10 most-traded Asian currencies outside of Japan. Korea's currency rose 0.5 percent to 991.25 against the dollar as of 10:03 a.m. in Seoul, according to Seoul Money Brokerage Services Ltd. Overseas investors bought more Korean shares than they sold every day of the week except one. The benchmark Kospi index climbed 1.4 percent.

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