South Korean Economy Grows at Weakest Pace in 4 Years

By William Sim

Oct. 24 (Bloomberg) -- South Korea's economy grew at the slowest pace in four years last quarter, sparking concern the nation is headed for its first recession since emerging from the 1997-1998 Asian financial crisis.

The economy expanded 0.6 percent from the previous three months, when it advanced 0.8 percent, the central bank said in Seoul today. Exports of goods declined 1.8 percent in the quarter and household spending rose just 0.1 percent.

Korea's stock index fell 2.4 percent, heading for the worst week since 1997, and the won traded close to a 10-year low. The risk of a recession may force the central bank to cut interest rates again and the government to increase aid efforts after this week pledging $130 billion in support for banks and as much as $8 trillion won ($6 billion) for the building industry.

``The speed of the economic downturn has accelerated,'' said Kim Jae Eun, an economist at Hana Daetoo Securities Co. in Seoul. ``There's more reason to come up with further measures to help the economy; the most effective is likely to be more interest-rate cuts.''

The quarterly gross domestic product figure matched the median estimate of 16 economists surveyed by Bloomberg News.

Growth is cooling across Asia, where China's expansion moderated to the weakest in five years last quarter, Japan's economy shrank in the second quarter and Singapore tumbled into a recession in 2008.

From a year earlier, South Korea's $970 billion economy expanded 3.9 percent, the slowest pace since 2005, and down from 4.8 percent growth in the second quarter, today's report showed.

Stocks Slump

The Kospi index of shares fell to 1,024.05 at 9:49 a.m. in Seoul, extending this year's decline to 46 percent. The won slipped 0.1 percent to 1,410.50 per dollar, and has slumped 34 percent in 2008, Asia's worst-performing currency.

``The Korean economy will not be able to avoid a recession,'' said Arthur Woo, a Hong Kong-based economist at Merrill Lynch & Co. ``With global demand conditions set to slow further, this should have a knock-on effect to Korean exports.''

Companies are starting to feel the pinch of the global slowdown. Posco, Asia's biggest maker of stainless steel, said this week it will slash planned output by about a third this quarter and rival South Korean steelmakers may also cut production to cope with moderating demand.

Korea Electric Power Corp., supplier of almost all of the nation's power, forecast its first loss in its 26-year history because of record oil and coal costs and the falling won.

Jobs growth slowed in September to the weakest pace since 2005 as manufacturers, builders and retailers cut workers.

Interest Rates

The Bank of Korea cut benchmark interest rate to 5 percent on Oct. 9, the first reduction in four years. The board meets again on Nov. 7.

``We forecast 2008 economic growth of 4.5 percent, but will have to lower our projection significantly,'' Hana Daetoo's Kim said. ``The central bank should take steps -- interest rates may go as low as 4 percent.''

South Korea this week pledged $130 billion, equivalent to 14 percent of GDP, to support lenders as the credit crunch saps banks' access to foreign funds. It will give lenders access to $30 billion in U.S. dollars and guarantee $100 billion of foreign-currency debt.

The government will spend up to 8 trillion won to revive the construction industry, including buying land and unsold homes. The central bank said yesterday will make an extra 2.5 trillion won available for banks to lend at discount rates to small companies.

Not 1997

The financial-aid plan, coupled with the government's relatively low debt and ample foreign reserves, may help South Korea avert a repeat of 1997 when it needed the emergency $57 billion bailout from the International Monetary Fund, the three main ratings companies signaled this week.

Moody's Investors Service and Fitch Ratings affirmed South Korea's sovereign credit ratings on Oct. 21. Standard & Poor's said the government's bank package is more ``swift and broad'' than expected.

South Korea's debt ratio is close to the lowest among major economies, said the Organization for Economic Cooperation and Development. The government's financial liabilities stood at 28 percent of GDP in 2006, compared with Japan's 180 percent and 62 percent in the U.S., according to the OECD Web site.

The nation's $240 billion in foreign reserves are the world's sixth-biggest holdings.

South Korea's real gross domestic income, a measure of purchasing power, declined 3 percent from the previous quarter, when it rose 1.4 percent, today's report showed. That's the biggest drop since the first quarter of 1998.

Domestic demand, which includes private and corporate spending, rose 0.4 percent in the third quarter from the previous quarter, after a 0.2 percent gain in the second quarter.

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