UPDATE 5-South Korea heads towards first recession in 11 years

Thu Jan 22, 2009 1:56am EST

(Updates markets in paragraph 12)

By Cheon Jong-woo and Yoo Choonsik

SEOUL Jan 22 (Reuters) - South Korea's economy suffered its second-biggest contraction on record in the final quarter of 2008, pushing it towards its first recession since the Asian financial crisis and paving the way for more interest rate cuts.

The data released on Thursday along with gloomy economic and export figures announced in neighbouring Japan and China, provided new evidence that the worst recession in decades was taking a heavy toll on Asia's biggest economies.

"The weak numbers will make authorities exhaust all their means to support the economy," said Kim Jae-hong, an economist at Shinyoung Securities.

"I initially thought the Bank of Korea would stop cutting interest rates at around 1.75 percent but it will likely cut further. The central bank can also step up fund injections."

Gross domestic product in Asia's fourth-largest economy fell a seasonally adjusted 5.6 percent in the fourth quarter of 2008 from the previous three months, more than twice as much as economists had expected, the central bank said.

The steeper-than-expected downturn and still weakening exports suggest it may miss the central bank's 2 percent growth forecast, a senior official at the Bank of Korea told reporters.

Economists said the bleak data raised chances for additional stimulus from the government and the central bank, including another steep rate reduction next month on top of a combined 2.75 percentage points of cuts in the policy rate since early October.

PRESIDENT LEE UNDER PRESSURE

The Bank of Korea next reviews the rate, which stands at 2.5 percent, on Feb. 12.

As consumer demand collapsed around the world, two of South Korea's top manufacturers -- Hyundai Motor (005380.KS) and LG Electronics (066570.KS) -- announced much worse than expected quarterly earnings and presented an even gloomier outlook.

The government of President Lee Myung-bak, who says the country is facing a state of economic emergency, has already offered around 140 trillion won ($102 billion) worth of stimulus packages including tax cuts.

The data puts President Lee, whose popularity has nose-dived since he took office 11 months ago and who this week replaced his two economic policy makers, under more pressure to find an effective response to the slump which threats to deepen unemployment.

Seoul stock market's main index .KS11 rose a modest 1.1 percent as bargain-hunting after a 10 percent loss over the past two weeks and investor hopes for additional pump-priming by the government more than offset economic and earnings worries.

Treasury bond futures <0#KTB:> rose on expectations of additional interest rate cuts, while the won KRW= ended local trade down slightly on weak export prospects.

Economists in a Reuters poll had estimated GDP shrank 2.7 percent in the fourth quarter.

Exports in the quarter fell the most in three decades as companies and consumers around the world cut spending in the face of recession and as evidenced by Chinese data. [ID:nPEK343570]

Data released by Japan on Thursday also showed exports by the world's second-largest economy fell the most on record in December and business sentiment hit a fresh low. [ID:nT343750]

South Korea's fourth-quarter GDP fell 3.4 percent from a year earlier, also much worse than market expectations for a 0.7 percent decline.

OUTLOOK DARKENS

For all of 2008, South Korea's economy expanded by 2.5 percent, its slowest gain in a decade and half the rate of 2007.

The central bank forecast in December the economy would grow 2 percent this year, but an increasing number of private sector experts forecast a contraction of as much as 3 percent as the global downturn deepens.

The head of the central bank's statistics department, Choi Choon-shin, also told reporters that this year's growth could miss the 2 percent forecast. The Bank of Korea is due to release revised forecasts in April.

South Korea's economy derives more than half of annual output from domestic services although export industries still hold the key. It has suffered annual declines only twice since its industrialisation drive kicked off about four decades ago.

South Korean customs figures showed this week demand for the country's exports plunged from almost all regions as the global recession keeps spreading, with demand from China and European countries shrinking by more than a third over a year earlier.

* For a related graphic, double-click: here

* For full table of Q4 GDP, see [ID:nSEO347720]

* For analysts' comments, see [ID:nSEO351432]

* For 2009 economic forecasts, see [ID:nSEO38169]

* For anti-crisis measures, see [ID:nSEO299632]

* For earnings stories, double-click [KR-RES]

* For more stories on the global economy, see [ID:nTOPMACRO] ($1=1368.0 Won) (Additional reporting by Jungyoun Park; Editing by Jonathan Thatcher & Jan Dahinten)

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