Tags: AS | SKorea | Economy

South Korea's Economy Grows 1.8 Percent in First Quarter

Tuesday, 27 Apr 2010 10:21 AM

 

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South Korea's economic growth accelerated sharply in the first quarter of 2010 amid a rebound in manufacturing, exports and spending.

Asia's fourth-largest economy expanded 1.8 percent in the three months ended March 31 from the fourth quarter last year when it grew 0.2 percent, the Bank of Korea said Tuesday.

The result beat the central bank's own forecast of a 1.6 percent expansion made earlier this month.

South Korea has recovered strongly from the global downturn, boosted by record-low interest rates, government stimulus spending and robust exports as overseas markets recover.

The central bank said this month it expects the economy this year to grow at its fastest pace in four years. Moody's Investors Service, meanwhile, rewarded South Korea with a higher credit rating for emerging from the global crisis with its finances intact.

Growth figures for the first quarter are likely to intensify speculation about the timing of a Bank of Korea interest rate hike. The rate is currently at a record low 2 percent.

The economic expansion in January-March is the fifth straight quarter that South Korea's economy has grown after contracting over the final six months of 2008. The GDP results are preliminary and may be revised.

"The recovery is pretty well established," said Oh Suk-tae, regional head of research at Standard Chartered First Bank Korea in Seoul. "Growth is clearly picking up again."

Oh said that the 1.8 percent figure equates to an expansion of 7.5 percent on an annualized basis. The bank does not provide an annualized figure.

Manufacturing grew 3.6 percent in the first quarter after contracting 1.7 percent in the fourth, as the country's factories churned out more semiconductors and other electronics-related products, the central bank said.

Exports also rebounded to expand 3.4 percent after shrinking 1.5 percent. "This growth mainly reflected the upswing in exports of cars, semiconductors and of LCDs," the bank said in a release.

South Korea is the home of Hyundai Motor Co. and Kia Motors Corp., which together form the world's fifth-biggest automotive group.

Samsung Electronics Co. and Hynix Semiconductor Inc., meanwhile, rank No. 1 and No. 2, respectively in computer memory chips. Samsung and LG Display Co. hold similar rankings in liquid crystal displays.

Government spending jumped 5.7 percent after a contraction of 2.4 percent, with the bank crediting an increase in social security expenditure. Private spending, meanwhile, improved to grow 0.6 percent from the fourth quarter's 0.4 percent.

The economy also grew in the first quarter compared with the same period the year before, expanding 7.8 percent for the best performance since growth of 8.1 percent in the final quarter of 2002.

The GDP figures were not enough to cheer investors, however, as South Korea's benchmark stock index declined Tuesday from a 22-month high hit the day before, falling 0.2 percent to close at 1,749.55.

The South Korean won, meanwhile, fell 0.5 percent to close at 1,110.10 against the dollar after Ministry of Strategy and Finance official Kim Ik-joo issued a warning over the currency's recent strength, saying foreign exchange authorities would take "proper measures" to combat it.

Such language is meant to show that the ministry and central bank are ready to intervene in the currency market to weaken the won, which has risen 4.9 percent this year and remains near a 19-month high.

Though a stronger local currency has benefits in that it can reduce South Korea's energy import bill and check inflation, it can also make the country's exports less competitive in overseas markets.

Despite expanding in every quarter in 2009, the economy ended the year a meager 0.2 percent bigger, the worst performance since it contracted 5.7 percent in 1998 during the Asian economic crisis.

Prospects this year look much brighter. The central bank on April 12 raised its 2010 economic growth forecast from 4.6 percent to 5.2 percent on stronger exports and domestic demand. If achieved, that would be the best performance since a similar expansion in 2006.

Moody's on April 14 lifted South Korea's government bond ratings to A1 from A2 — the first increase since July 2007 — saying the country escaped the global downturn without a large increase in government debt and kept its fiscal deficit relatively small.

The Bank of Korea slashed its key interest rate six times from October 2008 to battle the global financial meltdown and ensuing economic slump. The rate has been at 2 percent since February last year.

South Korea's government has cautioned against what it sees as any hasty attempt by the independent central bank to lift borrowing costs, though Oh said resistance my be waning amid strong growth figures.

"I think maybe even the government will let the central bank raise interest rates," Oh said. He expects a hike of a quarter percentage point in the third quarter.

© Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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