South Korea Economy Will Shrink 2% in 2009, Macquarie Forecasts

By Seyoon Kim

Nov. 26 (Bloomberg) -- South Korea’s economy will contract 2 percent next year as exports slump amid a global economic slowdown, Macquarie Securities Ltd. forecasts.

“The global situation has deteriorated sharply while domestic dislocations have made it harder to find credible alternatives to support growth as exports collapse,” Bill Belchere, an economist at Macquarie Securities Ltd. in Hong Kong, said in a note yesterday. “The global deleveraging and deflation that are likely to unfold over the next few quarters is not good news for Korea.”

Macquarie’s forecast comes after UBS AG said last week South Korea’s economy will shrink 3 percent in 2009. Macquarie previously estimated Asia’s fourth-largest economy would expand 2.5 percent next year, following 3.6 percent growth this year.

The economy expanded at the weakest pace in four years last quarter as exports slumped by the most in seven years and consumer spending slowed. Exports rose in October at the slowest pace in 13 months, the government said earlier this month, while other reports have shown manufacturers’ confidence sank to the lowest in more than a decade and consumer confidence fell to a four-month low.

Macquarie said the economy is likely to fall into a “recession” on a quarterly basis in the fourth quarter. Exports are forecast to contract by 12 percent next year, it said.

Separately, Citigroup Inc. forecast South Korea’s economic growth will slow to 2 percent next year from an estimated 4.2 percent in 2008. DBS Group Holdings Ltd. lowered its growth forecast for South Korea this year and next to 4 percent and 1.4 percent respectively, from a previously estimated 4.4 percent and 3.5 percent.

‘Double Trouble’

“Korea faces double trouble of slower exports due to the global recession and liquidity tightening due to global deleveraging,” Seoul-based Citigroup economist Oh Suk Tae said in a report today. “Given Korea’s high dependence on exports, the consensus expectation is that global growth in 2009 will be the worst since World War II, which is bad news for the Korean economy.”

Oh says the Bank of Korea will cut its benchmark interest rate to a record low of 3 percent and the government will increase spending to help the economy.

The central bank has cut interest rates three times in a month, most recently on Nov. 7, to 4 percent. The government on Nov. 3 pledged to spend 14 trillion won ($9.2 billion) in 2009 to boost economic growth by an estimated 1 percent.

South Korea’s economy last contracted in 1998 during the Asian financial crisis.

The Organization for Economic Cooperation and Development forecast yesterday South Korea’s economy will expand 2.7 percent in 2009.

To contact the reporter on this story: Seyoon Kim in Seoul at Skim7@bloomberg.net