South Korea's Economic Growth Slows on Spending Cuts

Business Materials 26 April 2008 06:25 (UTC +04:00)

South Korea's economy expanded at the slowest pace in more than three years in the first quarter as consumers and companies curtailed spending.

The economy grew 0.7 percent from the previous quarter, when it advanced 1.6 percent, the central bank said in Seoul today. That compares with the 0.9 percent median estimate of 13 economists surveyed by Bloomberg News.

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 government is considering adding 4.9 trillion won ($4.9 billion) to its budget for the year in an effort to sustain the country's nine- year expansion, Finance Minister Kang Man Soo said yesterday.

``The government will gear up efforts to support growth as domestic demand, especially corporate spending, weakens,'' said Chun Chong Woo, senior economist at SC First Bank Korea Ltd. in Seoul. ``Companies won't spend more when things are all looking bad despite President Lee's drive to promote business spending.''

From a year earlier, Asia's fourth-largest economy expanded 5.7 percent in the first quarter, matching the previous period's pace.

The won traded at 996.60 at 12:24 p.m. in Seoul from 996.35 late yesterday. The yield on the five-year government bond fell 3 basis points to 4.94 percent, according to Korea Exchange.

Slowing economic growth may add pressure on the Bank of Korea to join the U.S., England and Canada in cutting interest rates. The Bank of Canada this week lowered its benchmark rate by half a point to stimulate the economy.

Governor Lee Seong Tae left borrowing costs unchanged at 5 percent for an eighth straight month on April 10 and said economic growth may slow ``significantly'' and inflation may moderate, fueling speculation he will cut borrowing costs this year. The board next meets on May 8.

``Things will get worse in the second quarter, but growth may pick up in the second half as exports remain steady and business spending gathers pace again,'' Choi Chun Sin, head of the central bank's statistics department said in Seoul today. ``It will be difficult for private spending to recover.''

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.

``Rising raw-material costs are boosting the nation's import bill and thus eating into people's incomes,'' said Lim Jiwon, senior economist at JPMorgan Chase & Co. in Seoul.

Domestic demand, which includes private and corporate spending, grew 0.1 percent, the slowest pace since the third quarter of 2004, the central bank said.

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.

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.

Consumers turned pessimistic for the first time in a year last month and manufacturers' confidence declined from a three- month high. Private consumption growth slowed to 0.6 percent from the previous quarter when it increased 0.8 percent, the bank said today.

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.

Hynix Semiconductor Inc, the world's second-largest maker of memory chips, said on April 20 it may cut spending by as much as 1 trillion won in the second half of this year because of lower chip prices and weak demand.

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.

Deteriorating economic conditions are making it difficult to meet this year's growth target of 6 percent, Finance Minister Kang said April 15, two days after President Lee Myung Bak urged his Cabinet to find ways to sustain domestic demand.

The value of South Korea's shipments overseas fell 1.1 percent in the quarter from the previous period as prices for semiconductors declined, the central bank said.

Exports are equivalent to about 40 percent of gross domestic product. From a year earlier exports climbed 12.8 percent.

While Choi said 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, he said.