April 23, 2015 / 4:00 AM / 5 years ago

UPDATE 2-South Korea economy picks up, may need more stimulus

* Q1 GDP +0.8 pct s/adj q/q (Reuters poll +0.7 pct)

* Q1 GDP +2.4 pct y/y (Reuters poll +2.4 pct)

* Weak exports, poor budget revenue pose risks

* Markets price in another interest rate cut (Updates after news conference, new details, markets)

By Christine Kim

SEOUL, April 23 (Reuters) - South Korea’s economic growth picked up in January to March after plunging in last-quarter 2014, but the economy still faces challenges such as a slowing China and poor domestic tax revenue.

The central bank trimmed its benchmark interest rate in March for the third time in less than a year to a record-low 1.75 percent, but markets have already priced in yet another rate cut soon to sustain the shaky recovery.

The Bank of Korea’s first official estimates out on Thursday showed gross domestic product grew a seasonally adjusted 0.8 percent quarter on quarter, led by a dramatic upswing in construction spending.

GDP growth was sharply up from a 0.3 percent rise in the December quarter and just above a median 0.7 percent gain tipped in a Reuters survey of 22 analysts. But it was far from strong, given the unusually weak reading for final-quarter 2014.

“The economic outlook for Korea remains challenging. Household consumption growth has not recovered, while weak global demand is forecast to constrain trade,” said Ronald Man, economist at HSBC in Hong Kong. “

Man expects another cut in the Bank of Korea’s base rate to a record low of 1.50 percent before the end of September. South Korea’s 1-year treasury bonds yield 1.698 percent, lower than the central bank’s current policy rate of 1.75 percent.

DISTORTIONS AND ANXIETY

First-quarter growth was led by a whopping 7.5 percent rise in construction spending on-quarter - the strongest in 14 years - but it fell short of recovering all of the 7.8 percent drop seen in the final quarter of 2014.

Reflecting these distortions, gross domestic product during the January-March period grew just 2.4 percent from the comparable period of 2014, down from a 2.7 percent rise in the fourth quarter and below a five-year average of 3.8 percent.

Globally low energy prices, and the recovering local housing and stock markets should the boost spending power of South Korean households, but actual consumption may still be muted by the lack of public confidence in recovery.

“I know there are some good things happening in the economy but it’s the sentiment that matters and I notice from my guests that they are worried about the future,” said Oh Hyun-joo, a taxi driver in Seoul.

Additional reporting by Yeawon Choi; Writing by Choonsik Yoo; Editing by Eric Meijer

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