South Korean Economy Shrinks More-Than-Expected 5.6%

By William Sim

Jan. 22 (Bloomberg) -- South Korea’s economy shrank a larger-than-expected 5.6 percent last quarter, the biggest decline since the Asian financial crisis a decade ago as exports, business investment and consumer spending plunged.

The contraction followed growth of 0.5 percent in the third quarter and was more than twice the 2.1 percent drop forecast in a Bloomberg News survey of 10 economists. The economy shrank 3.4 percent from a year ago, the central bank said in Seoul today.

Signs of looming recession add pressure on President Lee Myung Bak to expand his 51 trillion won ($37 billion) stimulus program and on the central bank to cut interest rates from a record low. Lee, whose popularity has dropped by more than half since he took office early in 2008, this week replaced four top members of his economic team as he works to revive confidence and combat the deepest slump since 1998.

“Today’s figures are shocking,” said Chun Chong Woo, an economist at Standard Chartered First Bank Korea Ltd. in Seoul. “Policy makers certainly have to cut rates further and take more stimulus measures.”

The country’s 10-year expansion has floundered as China’s slowdown exacerbates a plunge in European and U.S. demand for Korean-made cars, electronics, ships and semiconductors. Overseas shipments are equivalent to about 50 percent of gross domestic product.

Goods exports tumbled 11.9 percent last quarter from the previous three months, the biggest decline since 1979.

Stocks, Currency

The Korean won, the region’s worst performing currency last year, rose 0.2 percent to 1,370.10 per dollar at 9:57 a.m. in Seoul. The Kospi stock index gained 0.5 percent to 1,109.56.

Hyundai Motor Co. and Kia Motors Corp. cut working hours and GM Daewoo Auto & Technology Co. and Renault Samsung Motors Co. idled plants in December. Samsung Electronics Co., Asia’s biggest maker of chips, this week combined its four major businesses into two and reduced the number of executives in one of its biggest restructurings in a decade.

South Korea’s contraction is being echoed across Asia’s export-dependent nations.

Singapore’s GDP declined an annualized 16.9 percent in the fourth quarter, the biggest drop on record. Its government may announce record budget spending today.

Asia Slowdown

China’s economy grew 6.8 percent last quarter from a year earlier, the weakest in seven years, according to economists surveyed before today’s GDP report.

“The region’s high vulnerability to the ongoing external- demand shock calls for further decisive policy action,” Goldman Sachs Group Inc. economists Michael Buchanan and Eva Yi wrote in a report. “Korea is in a recession and further contraction is likely ahead.”

South Korea has allocated about 140 trillion won, or 15 percent of GDP, in extra liquidity, tax cuts and stimulus spending. The central bank this month cut its key interest rate to 2.5 percent, the fifth reduction since October.

“The economy is worsening faster than expected,” new Vice Finance Minister Hur Kyung Wook told reporters today. “We will try to speedily implement announced measures for the economy.”

Domestic demand, which includes private and corporate spending, slipped 5 percent, the biggest drop since 1998. Construction investment fell 4 percent and factory investment plunged 16.1 percent. Household spending declined 4.8 percent.

Purchasing Power

Consumers are losing confidence amid rising unemployment, while falling stock and property prices have reduced the wealth of households.

Real gross domestic income, a measure of purchasing power, declined 2.9 percent from the previous quarter.

The Kospi index has plunged 40 percent since the start of 2008, and apartment prices in some parts of the capital Seoul fell about 30 percent last year. Employment dropped last month for the first time since October 2003.

“The central bank should cut rates further, while the government can allocate extra spending and trim taxes more,” said Kim Jae Eun, an economist at Hana Daetoo Securities Co. in Seoul. “The incoming finance minister will also have a bigger load to help Korea overcome this economic slump.”

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

The economy advanced 2.5 percent in 2008, the weakest pace since 1998. The Bank of Korea likely will cut its 2009 growth forecast of 2 percent, said Choi Chun Shin, head of the bank’s statistics department.

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