South Korea's Economy Likely Maintained Growth Pace on Exports

By William Sim

July 24 (Bloomberg) -- South Korea's economy probably expanded in the second quarter at the same pace as the first as export gains made up for cooling consumer and business spending.

The economy grew 0.8 percent from the previous three months, according to the median estimate of 14 economists surveyed by Bloomberg News. The report is due at 8 a.m. in Seoul tomorrow.

Shipments to emerging markets will help extend South Korea's expansion, the Bank of Korea forecast in its semi-annual report on July 1. At home, soaring fuel costs and a weaker won are driving the fastest inflation in almost 10 years, squeezing household incomes and corporate profits.

``We're entering a slowdown and the question that remains is how much strong exports can offset weak domestic demand,'' said Chun Chong Woo, an economist at SC First Bank Korea Ltd. in Seoul. ``The outlook depends on oil prices.''

Gross domestic product increased 4.8 percent last quarter from a year earlier, after a 5.8 percent gain in the previous quarter, the survey showed. The government on July 2 trimmed its 2008 growth forecast to 4.7 percent from 6 percent.

Signs of a slowdown are emerging in Asia's fourth-largest economy. Exports, which make up about half of GDP, rose by the least in five months in June. Factory output had the smallest gain in a half year in May. Consumer and business confidence is also waning, suggesting the slowdown may deepen.

Record Debt

South Korean households, burdened with record debt, were the most pessimistic in more than 3 1/2 years in June, while manufacturers' confidence for July sank to the lowest in more than three years.

President Lee Myung Bak has vowed to fight inflation as his popularity slumps amid public anger over soaring living costs and his decision to lift a ban on U.S. beef imports. The focus of policy makers may shift back to supporting growth should oil prices subside and inflation begin to cool.

South Korea's government has dropped its support for a weaker won and is trying to keep the local currency from falling further to help contain inflation.

The Bank of Korea has possibly spent more than $12 billion since the end of May to boost the value of the nation's currency and cool inflation, said Jung Chan Ho, a currency dealer at Shinhan Bank in Seoul.

Won's Drop

The won, which fell as much 11.5 percent this year, is now down 8 percent. Its decline has exacerbated price pressure by boosting import costs.

Exports to China and other emerging markets will help keep South Korea's $970 billion economy from cooling too much as domestic demand slows, the Bank of Korea said on July 1. The bank expects the economy will grow 4.6 percent this year, down from 5 percent growth in 2007.

Governor Lee Seong Tae and his policy board left borrowing costs at 5 percent this month and said economic growth may slow and inflation may stay high for a ``significant period of time,'' fueling speculation he will raise borrowing costs this year. The board next meets on August 7.

The following table shows estimates for GDP from the previous quarter and from a year earlier, as well as predictions for 2008 and 2009 growth.

                                    QoQ%   YoY%   2008   2009
-------------------------------------------------------------
Median                              0.8%    4.8%   4.4%   4.5%
Average                             0.8%    4.8%   4.4%   4.4%
High                                1.3%    5.3%   4.8%   5.1%
Low                                 0.5%    4.3%   4.0%   3.2%
Number of Forecasts                  14      19     16     16
=============================================================
Action Economics                    0.8%   4.8%   4.5%   4.5%
Citibank                            0.7%   4.6%   4.0%   3.7%
CJ Investment & Securities          0.5%   4.7%   4.5%   4.9%
Daewoo Securities                   0.8%   4.6%   4.5%   4.7%
DBS Group                           1.2%   5.1%   4.6%   5.0%
Forecast Singapore Ltd.             ----   4.9%   4.2%   3.6%
Good Morning Shinhan Securities     0.6%   4.6%   4.6%   5.1%
HMC Investment Securities           0.7%   4.6%   4.1%   3.2%
HSBC                                ----   4.7%   4.1%   4.4%
Hyundai Securities                  0.9%   4.9%   4.8%   4.9%
ING Bank                            1.1%   5.0%   ----   ----
Lehman Brothers                     0.9%   4.8%   4.1%   4.4%
Moody's Economy.com                 0.9%   4.8%   4.2%   4.0%
Morgan Stanley                      ----   5.1%   ----   ----
Samsung Economic Research Institute 1.3%   5.3%   4.7%   4.5%
Samsung Securities                  0.6%   5.1%   4.3%   3.5%
SC First Bank                       ----   4.3%   4.5%   5.0%
Thomson IFR                         0.6%   4.5%   4.2%   5.0%
UBS Securities                      ----   4.5%   ----   ----
=============================================================

To contact the reporter on this story: William Sim in Seoul at wsim2@bloomberg.net.