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UPDATE 1-South Korea Q2 growth dips on poor consumption, stimulus looms
July 23, 2014 / 11:31 PM / 3 years ago

UPDATE 1-South Korea Q2 growth dips on poor consumption, stimulus looms

(Adds details, economist)

* Q2 GDP +0.6 pct q/q (+0.7 pct forecast, +0.9 pct in Q1)

* Q2 GDP +3.6 pct y/y (+3.6 pct forecast, +3.9 pct in Q1)

* Government due to unveil stimulus steps later on Thursday

* Analysts expect interest rate cut as soon as Aug. 14

By Christine Kim and Choonsik Yoo

SEOUL, July 24 (Reuters) - South Korea’s economy logged its weakest growth in more than a year in the second quarter as a deadly ferry accident cooled domestic demand while a strong won hit exporters.

The economy grew a seasonally adjusted 0.6 percent in the April-June period from the prior quarter, central bank estimates showed on Thursday, down from a 0.9 percent rise in the first quarter and the slowest since the first quarter of 2013.

Asia’s fourth-largest economy, which relies heavily on exports, is seeing a slower-than-expected recovery in global demand, while domestic consumption has been fragile, partly as a result of the ferry sinking that hurt tourism and services.

Financial markets have priced in an interest rate cut as soon as next month, while the government has said it will implement stimulus measures to bolster the flagging economy. A news conference on the stimulus plan is due later in the day.

“Domestic spending will likely improve (in the coming months) and the pace of recovery will depend on the effects of the government’s stimulus policies,” said Lee Seung-hoon, economist at Samsung Securities.

“We see a high possibility of a rate cut in August, but it will be a one-off thing,” he said, adding the rate reduction would be more to cooperate with the government’s stimulus efforts than because of any serious cyclical downturn.

The median forecast from a Reuters survey of 27 analysts had predicted the economy would post growth of 0.7 percent in the second quarter, with forecasts ranging from 0.1 percent to 0.8 percent.

The Bank of Korea estimates showed private consumption fell a seasonally adjusted 0.3 percent in the second quarter after edging up 0.2 percent in the January-March period. Capital investment rose 1.3 percent after a 1.9 percent decline.

MARKETS PRICE IN RATE CUT

It was the worst fall in private consumption since the third quarter of 2011 and only the second quarterly loss since then.

On the bright side, exports grew a seasonally adjusted 1.9 percent in the second quarter, up from a 1.5 percent rise in the first quarter and accelerating for a third consecutive quarter.

The Sewol ferry sank on April 16, killing more than 300 people in the country’s worst maritime accident in two decades. That led to massive cancellations of tour contracts across the country, badly affecting all businesses serving tourists.

Private consumption generates about half of South Korea’s gross domestic product but the economy still relies heavily on exporters as their performance has a strong influence on jobs and investment within the country.

The won has also emerged as an important factor for the Bank of Korea’s policy as an appreciating currency cuts profits at exporters and lowers inflation. The won was up 12.9 percent against the dollar by the end of June from a year earlier.

Annual consumer inflation averaged 1.4 percent for the first six months, below the lower end of the central bank’s target band of 2.5 percent to 3.5 percent and weaker than its 1.7 percent estimate in January.

From a year earlier, South Korea’s gross domestic product rose 3.6 percent for the June quarter, matching a median 3.6 percent gain forecast in the Reuters survey but slowing from a 3.9 percent rise in the first quarter.

The finance ministry’s economic stimulus measures are widely expected to be focused on propping up the depressed local property market and increasing public spending, although the government has ruled out a supplementary budget.

The Bank of Korea downgraded its economic growth forecast for the whole of this year to 3.8 percent from the previous 4.0 percent, with many analysts seeing the projection as still too optimistic. The economy expanded 3.0 percent in 2013.

Editing by Jacqueline Wong

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