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Thursday, April 25, 2019, 14:11
S. Korea economy shrinks most since 2008 as investment slows
By Bloomberg
Thursday, April 25, 2019, 14:11 By Bloomberg

Royal Dutch Shell Plc's Prelude floating liquefied natural gas (FLNG) facility in its completed state is illuminated at dusk at the Samsung Heavy Industries Co. shipyard in Geoje, South Korea, on June 27, 2017. (SEONGJOON CHO / BLOOMBERG)

South Korea’s gross domestic product shrank the most in a decade as declining investment, weakness in the technology sector and falling exports take a toll on Asia’s fourth-largest economy.

The 0.3 percent contraction in the first quarter from the previous three months, versus estimates for a 0.3 percent gain, is likely to further dent the popularity of President Moon Jae-in as his push to boost jobs and incomes falters. Korean stocks fell as much as 0.6 percent in early trading in Seoul while the won slid to the weakest level since March 2017.

The worse-than-expected GDP data, coupled with inflation that’s well below Korea’s 2 percent target, ought to encourage the central bank to respond with lower interest rates

Rob Carnell, Asia-Pacific head of research and chief economist at ING Bank

ALSO READ: South Korea plans biggest budget increase in 10 years

Exports, which account for about half of Korea’s GDP, are on course for a fifth-straight monthly decline amid weak demand from China, the nation’s biggest market. The broader slowdown in the global economy and soft demand for semiconductors are also biting, hurting corporate giants like Samsung Electronics Co and SK Hynix Inc.

Korea’s woes are a warning to other export-dependent economies as US-China trade tensions and a technology downturn weigh on shipments. The contraction comes even as Moon’s administration ramps up fiscal support, with an extra budget announced this week that came on top of a record budget already in place for 2019.

The Bank of Korea last week reduced its 2019 growth forecast to 2.5 percent while the government has announced a supplementary spending package of 6.7 trillion won (US$5.9 billion), which it says may push up GDP by 0.1 percentage point and create at least 73,000 new jobs.

Even so, it will probably still be "quite challenging for South Korea’s GDP growth to achieve the government’s 2.6-2.7 percent forecast," said Krystal Tan, economist at Australia & New Zealand Banking Group in Singapore. "Unless a stronger-than-expected recovery in the export sector materializes in the coming months, a bigger extra budget would probably be needed to push growth into that band."

Bank of Korea Governor Lee Ju-yeol blamed weakening exports, particularly of semiconductors, and slowing business investment for the growth downgrade. But he said exports and capital spending were likely to improve in the second half of the year.

Tech Pain

For now though, Korea’s reliance on memory chips is backfiring. Hynix, a supplier to Apple Inc, posted its worst operating-profit drop since 2012 on Thursday as memory-chip prices continue their free fall amid weakening demand from smartphone makers and data centers. Earlier in April, Samsung Electronics reported its worst operating-profit drop in more than four years.

The worse-than-expected GDP data, coupled with inflation that’s well below Korea’s 2 percent target, ought to encourage the central bank to respond with lower interest rates, said Rob Carnell, Asia-Pacific head of research and chief economist at ING Bank, Singapore. The benchmark rate has been unchanged at 1.75 percent since November last year.

“At the heart of this is the global semiconductor slump, which is weighing on both exports and investment, but also feeding through into generally weak domestic demand and sentiment,” said Carnell.

From a year earlier, the economy expanded 1.8 percent, compared with projections of 2.4 percent. Facilities investment fell 11 percent in the first quarter from the previous three months, the biggest drop in 21 years. Construction investment declined 0.1 percent from the earlier period, when it gained 1.2 percent.

GDP export volumes fell 2.6 percent from the previous three months, import volumes fell 3.3 percent, government spending rose 0.3 percent, and private spending gained 0.1 percent.

Finance Minister Hong Nam-ki said the economy would improve in the second quarter, and also that the second half of the year would be better than the first six months as the government focuses on building up economic momentum.

READ MORE: S. Korea slashes growth forecast on trade war concern

Deputy Finance Minister Kim Hoe Jeong said Korea would take active measures in the currency market, including smoothing operations, in case of abnormal moves.

The Moon administration has also been pre-occupied with inter-Korean relations after a summit between US President Donald Trump and Democratic People's Republic of Korea's leader Kim Jong-un collapsed in February without any deal.

Meanwhile, Moon’s aggressive hikes to the minimum wage have been blamed for crimping jobs growth and imposing high costs on small business.

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