(Updates markets in paragraph 12)
By Cheon Jong-woo and Yoo Choonsik
SEOUL Jan 22 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
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
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
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
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.
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.
For all of 2008, South Korea's economy expanded by 2.5
percent, its slowest gain in a decade and half the rate of
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
* For a related graphic, double-click:
* 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
(Additional reporting by Jungyoun Park; Editing by Jonathan
Thatcher & Jan Dahinten)