South Korea Economy Probably Shrank in Fourth Quarter

By William Sim

Jan. 21 (Bloomberg) -- South Korea's economy probably contracted for the first time in 10 years last quarter as the global economic slump cooled demand at home and abroad.

Gross domestic product declined 0.3 percent from a year earlier, compared with the third quarter when it advanced 3.8 percent, according to the median estimate of 13 economists surveyed by Bloomberg News. A year-on-year contraction would be the first since 1998. The report is due at 8 a.m. in Seoul tomorrow.

President Lee Myung Bak, whose approval rating has fallen by half in the past year, replaced this week the four top members of his economic team to combat the economic slowdown. South Korea's benchmark Kospi index yesterday erased all of its gains for 2009 on concern that recessions in the U.S., Europe and Japan and weaker growth in China will take their toll of corporate earnings.

“The economy is cooling much faster than expected,” said Lee Sang Jae, an economist at Hyundai Securities Co. in Seoul. “Policy makers need to take stronger action to spur local demand as a buffer against falling exports.”

The Kospi index fell 2.2 percent to 1,102.15 at 9:55 a.m. in Seoul, for a 2 percent drop this year. The index had gained as much as 9 percent this year on Jan. 7.

To revive the economy, South Korea has allocated about 140 trillion won ($102 billion), or 15 percent of gross domestic product, in extra liquidity, tax cuts and stimulus spending. The central bank this month cut its key interest rate to a record low of 2.5 percent, the fifth reduction since October.

Economic growth shrank 2.1 percent from the third quarter, the first contraction since 2003, according to the survey. The economy almost certainly posted a large contraction last quarter, Bank of Korea Governor Lee Seong Tae said on Jan. 9, adding that 2009 will be a “very bad” year.

Exports Falter

Evidence is mounting that the economy may cool further as both local demand and exports falter.

South Korea's exports, which are equivalent to about 50 percent of the economy, declined 17.4 percent in December from a year earlier, the biggest drop since 2001.

That prompted Renault Samsung Motors Co. to idle plants in December. Ssangyong Motor Co., 51 percent owned by China's SAIC Motor Corp., applied for bankruptcy protection on Jan. 9 as plunging vehicle sales caused a “serious liquidity crisis.”

Other companies are cutting jobs. Hynix Semiconductor, the world's second-biggest maker of memory chips, said last month it would eliminate 30 percent of its executives. Hyundai Motor Co. and Kia Motors Corp. have reduced their employees' working hours.

Employment fell last month for the first time since October 2003. Consumer confidence in December fell to the lowest level since the fourth quarter of 1998, and manufacturers' confidence tumbled to a record low.

Bank of Korea

The central bank forecast last month that annual economic growth will slow to an 11-year low of 2 percent in 2009 from an estimated 3.7 percent last year.

Goldman Sachs Group Inc., UBS AG and Nomura International Ltd. all predict the economy will contract in 2009 for the first time since the 1997-1998 Asian financial crisis.

“Economic deceleration will prove sharper than expected,” Daniel Soh, an economist at Forecast Pte Ltd. in Singapore. “The recent cabinet reshuffle signals more forceful measures to spur growth in the pipeline.”

President Lee named Yoon Jeung Hyun, 62, as finance minister on Jan. 19, replacing Kang Man Soo, who was voted the worst minister in the economic team in a December poll of 82 economic professionals by Citizens' Coalition for Economic Justice, a civic group.

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

South Korea GDP Estimates
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Firm                          QoQ     YoY    2008    2009
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Median                      -2.1%   -0.3%    3.5%    0.7%
Average                     -2.4%   -0.6%    3.5%    0.4%
High                        -0.5%    1.7%    4.0%    1.8%
Low                         -5.4%   -3.3%    3.0%   -1.5%
Number of Estimates            10      13       9       8
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Action Economics           -2.50%  -0.30%   3.40%  -1.50%
Capital Economics          -0.50%   1.70%    n/a     n/a
Forecast Ltd.                n/a    0.50%   3.70%   1.10%
Good Morning Shinhan Secs  -1.50%  -1.00%   3.20%   1.50%
HI Investment & Securities -3.50%  -2.20%   3.00%   0.20%
Hyundai Securities         -1.90%   0.50%   3.60%   1.80%
Ideaglobal                   n/a   -1.20%   3.20%    n/a
ING Groep NV               -5.40%  -3.30%    n/a     n/a
Moody's Economy.com        -2.30%  -0.10%   3.50%  -0.20%
Nomura International Ltd   -4.50%  -2.40%    n/a     n/a
Reuters IFR                -0.50%   1.70%   4.00%  -1.50%
SC First Bank              -1.50%   0.80%   3.70%   1.40%
UBS                          n/a   -2.00%    n/a     n/a
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To contact the reporter on this story: William Sim in Seoul at wsim2@bloomberg.net.