South Korea’s Economy to Grow at Slowest in 11 Years

By William Sim

Dec. 12 (Bloomberg) -- South Korea’s economy will expand at the slowest pace in 11 years in 2009 as the deepening global recession cools demand at home and abroad, the central bank said.

The economy will grow 2 percent next year from an estimated 3.7 percent this year, the Bank of Korea said in its 2009 outlook in Seoul today. Exports of goods will rise 1.3 percent, slowing from an estimated 3.6 percent gain in 2008, it forecast.

“It seems difficult for our economy to recover its growth momentum in a short period of time,” the central bank said. “Domestic demand is weakening further and exports are expected to slow sharply because of the global economic downturn.”

Governor Lee Seong Tae and his board yesterday cut the benchmark interest rate by 100 basis points to a record low of 3 percent to keep the nation from entering the first recession since 1998. The possibility is “always open” for more rate cuts, Lee said, adding the economy may see “very low growth for a significant period of time.”

Korea is expected to expand 0.9 percent in the first half of next year and 1.3 percent in the second half, the central bank said. Growth will pick up to 4 percent in 2010 as the global economy recovers, it said.

“Policy makers need more action to spur growth and stabilize financial markets against the global economic and financial crisis,” said Kwon Young Sun, an economist at Nomura International Ltd. in Hong Kong, who expects the key interest rate to be cut to 2 percent by the first quarter of next year.

Spending Slump

Consumer spending is expected to rise 0.8 percent next year from an estimated 1.5 percent gain this year, and the jobless rate will rise to 3.4 percent from 3.1 percent in 2008, today’s report showed.

Consumer-price inflation will ease to 3 percent in 2009, from 4.7 percent estimated for this year, the central bank said. Inflation excluding fresh food and oil will moderate to 3.5 percent next year from 4.2 percent estimated this year.

The nation’s estimated $4.5 billion current-account deficit will probably turn to a surplus of about $22 billion next year, the central bank said.

Asian nations are being battered by faltering demand for their products amid recessions in the U.S., Japan and Europe and weakening growth in China. South Korea’s exports fell the most in almost seven years in November as shipments to China, its biggest overseas market, plunged 27.8 percent.

The World Bank said this week East Asia’s economies face “hard times,” and lowered its 2009 growth forecast for the region to 5.3 percent from the previously estimated 7.4 percent in April. International trade will shrink next year for the first time in more than 25 years, it said.

South Korea is also pumping funds into banks, cutting taxes and boosting public spending to limit the fallout from the global credit crisis, which sent the Korean won down more than 30 percent and the stock index tumbling 39 percent this year.

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