By Seyoon Kim
April 24 (Bloomberg) -- South Korea’s economy unexpectedly expanded in the first quarter, buoyed by record interest-rate reductions and the government’s $37 billion in tax cuts and infrastructure spending.
Gross domestic product rose 0.1 percent from the previous three months, avoiding a technical recession following the fourth quarter’s 5.1 percent slump. The median forecast in a Bloomberg survey of seven economists was for a 0.2 percent drop.
The International Monetary Fund said two days ago South Korea has room to add to fiscal stimulus and interest-rate cuts to ensure an economic recovery takes hold. Export declines eased last quarter as the won’s 30 percent drop against the dollar in the past year helped companies including Samsung Electronics Co. and Kia Motors Corp. weather a contraction in global trade.
“We’ve got blue sky ahead for Korean growth as the year unfolds,” said Tim Condon, head of Asia research at ING Groep NV in Singapore. “Fiscal policy in Korea has moved adroitly. We’re still feeling the cumulative effect of rate cuts.”
The won rose 0.5 percent to 1,341.6 versus the U.S. currency. The Kospi stock index fell 0.3 percent to 1,365.15 at 11:32 a.m. in Seoul. The index has climbed 21 percent this year following a 41 percent slump in 2008.
South Korea avoided the prolonged contractions gripping other nations. Singapore’s economy shrank an annualized 19.7 percent last quarter, a fourth straight decline. Japan has been in recession since the third quarter of 2008 and European GDP has dropped for three consecutive quarters. The U.S. may be in its longest recession since the 1930s.
Interest Rates
Bank of Korea Governor Lee Seong Tae left the benchmark interest rate unchanged at 2 percent for a second month on April 9 after 3.25 percentage points in reductions since early October, saying there are signs the economy’s slump may abate.
The government is awaiting parliamentary approval for an additional 17.7 trillion won ($13 billion) spending package announced last month that includes cash handouts and cheap loans.
A technical recession is defined as two consecutive declines in quarter-on-quarter GDP. South Korea’s economy shrank 4.3 percent from a year earlier following a 3.4 percent contraction in the fourth quarter.
Samsung Electronics said today it expects global demand for flat-panel televisions to rise more than 10 percent in the second quarter. South Korea’s biggest exporter posted a first- quarter profit that beat analysts’ expectations.
Recovery Hopes
Across the globe, policy makers are highlighting signs of recovery. Federal Reserve Vice Chairman Donald Kohn this week said the U.S. economy may stabilize in the second half and begin a slow rebound.
In China, the government’s fiscal stimulus drove investment up 30.3 percent in March and lending surged more than six-fold. China is the biggest customer for South Korean exports.
South Korea’s private consumption climbed 0.4 percent from the fourth quarter, government spending gained 3.6 percent and construction increased 6.1 percent, today’s GDP report showed.
“There has been a great emphasis in Korea on preserving employment,” ING’s Condon said. “This has been the support for household consumption. Looking at the next couple of quarters, this is only going to gather steam.”
Net exports, a measure of the change in exports minus imports, contributed 2.8 percentage points to GDP in the quarter.
Goods exports fell 3.4 percent from previous three months, easing from a 12.6 percent decline in the fourth quarter.
Currency Assistance
“Exports have been faring well compared with neighboring countries,” said Lim Jiwon, an economist at JPMorgan Chase & Co. in Seoul. “The weaker won is benefiting Korean exporters.”
Kia Motors, South Korea’s second-biggest automaker, today posted the highest profit in three years after it boosted domestic sales and as overseas earnings were helped by the currency’s drop.
While the nation’s exports plunged 21.2 percent in March from a year earlier, they climbed 11.4 percent from February. Overseas shipments are equivalent to about 60 percent of GDP.
Not all evidence point to a recovery. Consumer confidence dropped last month and the jobless rate rose to 3.7 percent, the highest since 2005.
“Our economy continues to be in a difficult situation” and is reliant on an improved world economy, Finance Minister Yoon Jeung Hyun said in Seoul today. “It will take quite some time for the global economy to be on a recovery track.”
Central bank statistics official Choi Chun Sin said the economy is stabilizing, though may not have “bottomed out” yet.
The global recession will be deeper and the recovery slower than previously thought as financial markets take longer to stabilize, the IMF said this week. Korea’s economy will shrink 4 percent in 2009 and grow 1.5 percent in 2010, the fund forecast.
“Given the sharp deterioration in activity, additional monetary easing seems appropriate” in South Korea, it said. “There is also ample room for additional fiscal support.”
To contact the reporter on this story: Seyoon Kim in Seoul at skim7@bloomberg.net
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