South Korea Economic Slump Probably Eased on Stimulus

By Seyoon Kim

April 23 (Bloomberg) -- The pace of South Korea’s economic contraction probably eased in the first quarter as the won’s decline aided exporters and unprecedented interest-rate cuts and government spending began to take effect.

Gross domestic product fell 0.2 percent from the previous quarter, when it shrank 5.1 percent, according to the median forecast of seven economists surveyed by Bloomberg. A second consecutive contraction would mark the nation’s first recession since 1998. The report is released at 8 a.m. in Seoul tomorrow.

The central bank reduced borrowing costs by 3.25 percentage points since early October to a record low and the government has allocated 50 trillion won ($37 billion) in stimulus spending. As well, the won’s 31 percent slump versus the dollar since the start of 2008 helped exporters win market share even as the global recession roils international trade.

“The rate of economic decline is decelerating thanks to a weaker currency and domestic policy steps,” said Kwon Young Sun, senior economist at Nomura International Ltd. in Hong Kong. “The GDP figures are likely to be a signal that South Korea doesn’t need further interest rate cuts.”

South Korea’s GDP probably contracted 4.6 percent from a year earlier compared with a 3.4 percent drop in the fourth quarter, according to the survey of economists.

Optimism the economy may recover has driven up the Kospi stock index 21 percent this year following a 41 percent drop in 2008. The index gained 0.4 percent to 1,361.58 at 11:21 a.m. in Seoul. The won rose 0.2 percent to 1,350.35 per dollar.

Slump Abates

Bank of Korea Governor Lee Seong Tae left his benchmark rate unchanged at 2 percent this month, saying there are signs the economy’s slump may abate.

Even though exports, which make up about 60 percent of GDP, plunged 21.2 percent in March from a year earlier, they rose 11.4 percent from February. Sales at the nation’s major department stores gained 4.5 percent in March and manufacturers’ confidence advanced to a five-month high.

Factory output climbed for a second month in February from January and inventories declined for a fourth month.

“The economy will turn around and expand in the second quarter from the first quarter,” said Go You Sun, an economist at Daewoo Securities Co. in Seoul.

“Companies, which had inventories piling up, have started to clear some of that as demand rises a bit,” she said. “A drop in the won as well as oil prices is also helping businesses.”

‘Better Result’

Handset shipments at South Korea’s LG Electronics Inc. will climb 10 percent this year, bucking an 11 percent drop in industry-wide sales, according to Nomura analyst James Kim.

“We hope to post a better result in the second quarter,” David Jung, chief financial officer of LG, said this week. “We’ll continue to make efforts to increase market share even as the overall industry may not see that much growth.”

South Korea may also benefit from a recovery in China, its biggest export market. Chinese urban fixed-asset investment surged by almost a third in March and industrial-output growth accelerated.

A pickup in China will contribute “strongly” to growth in the rest of Asia by increasing demand for commodities and products from around the region, according to the World Bank.

Hyundai Motor Co., South Korea’s largest automaker, raised its 2009 forecast for China sales by more than 11 percent to 400,000 vehicles.

Not all economic reports point to a rebound in South Korea. The jobless rate rose to 3.7 percent in March, the highest since 2005 as employment fell by the most in 10 years. Consumer confidence dropped in March for the first time in three months.

“There are both positive and negative factors facing the economy,” Finance Minister Yoon Jeung Hyun said yesterday.

To contact the reporter on this story: Seyoon Kim in Seoul at skim7@bloomberg.net