* Q2 GDP +0.6 pct q/q (+0.7 pct forecast, +0.9 pct in Q1)
* Private consumption in worst fall in nearly 3 years
* Government, c.bank unveil multi-billion-dollar stimulus
* Analysts expect interest rate cut as soon as Aug. 14
(Adds past stimulus, expected effects, new economist)
By Christine Kim and Choonsik Yoo
SEOUL, July 24 South Korea offered billions of
dollars in stimulus spending and property market-boosting steps
on Thursday to shore up demand after reporting its weakest
economic growth in more than a year.
Exports in Asia's fourth-largest economy have benefited less
than expected from a pick-up in the global economy this year,
but domestic demand has been fragile since a mid-April ferry
accident hit tourism and its services industry.
The government rolled out an additional 11.7 trillion won
($11.4 billion) in spending and 26 trillion won of loans or
other financial support, and loosened mortgage borrowing
The central bank separately offered banks up to 3 trillion
won to encourage them to expand lending at low interest rates to
companies that build factories in the country or buy machinery.
Analysts said the support package was likely to give at
least a short-term boost to consumer spending, but warned it
could add to household debt levels, already among the highest in
"This is surprising to us in that it marks a shift in policy
stance toward debt-driven growth from what was focused more on
containing debt," said Young Sun Kwon, economist at Nomura in
President Park Geun-hye has called for all-out efforts to
boost the economy and Finance Minister Choi Kyung-hwan promised
to take massive action, which investors believe will pressure
the central bank to cut interest rates as soon as next month.
The finance ministry said the stimulus spending would lift
this year's economic growth by 0.1 percentage point, but
economists said indirect effects such as a potential revival of
home prices could help spur household income.
The economy grew 0.6 percent in the April-June period over
the prior quarter, the weakest since the first quarter of 2013
and below expectations for 0.7 percent growth, data earlier on
Thursday showed. The ministry cut its 2014 growth forecast to
3.7 percent from 4.1 percent.
The latest stimulus package appeared focused on shoring up
consumer and corporate sentiment and reviving the property
market, compared with the previous one in early 2013, when the
government introduced a $5 billion supplementary budget that was
targeted at more directly lifting growth.
The government in a statement insisted the economy was
recovering, but warned that households and companies were in a
"serious lethargy" that could become permanent.
South Korean households are under pressure from a heavy debt
burden, shrinking property income and slowing job growth.
Official data shows income from real estate and financial
investment has declined for four consecutive quarters on year.
Housing prices across the country have fallen for six out of
the past seven years after adjustment for inflation and dropped
0.5 percent during the first half of this year, according to
data from the country's top mortgage lender, Kookmin Bank.
RATE CUT LOOMS
The Bank of Korea data 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.
It was the worst fall in private consumption since the third
quarter of 2011 and only the second quarterly loss since then.
The central bank later said that July's consumer sentiment
index due on Friday would be "very bad".
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.
"In the domestic tourism industry, how the public-sector
entities are doing is very important," said Nickey Joo, who runs
Air Tours Co. "All public-sector travelling was cancelled
immediately after the accident and that quickly stopped activity
in the private sector as well."
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 a firmer won 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.
Some top South Korean companies including SK Hynix
, Hyundai Motor and POSCO all
warned on Thursday of severe and sustained damage from the won's
appreciation, which ate into profits earned on overseas sales.
Unusually low inflation also underscores the currency
effects and depressed consumer demand. Annual 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.
Low inflation and the government's call for policy
coordination may prompt the Bank of Korea to cut interest rates
as soon as at its Aug. 14 meeting. It would mark the first rate
cut since May last year, when it also lowered interest rates to
support the government's stimulus efforts.
From a year earlier, the economy expanded 3.6 percent for
the June quarter, matching a median forecast of 3.6 percent in a
Reuters poll but slowing from 3.9 percent in the first quarter.
($1 = 1027.1000 Korean won)
(Additional reporting by Se Young Lee; Editing by Jacqueline