South Korea economy unexpectedly contracts in first quarter, worst since global financial crisis

SEOUL (Reuters) - South Korea’s economy unexpectedly shrank in the first quarter, marking its worst performance since the global financial crisis, as companies slashed investment and exports slumped in response to Sino-U.S. trade tensions and cooling Chinese demand.

FILE PHOTO: A man walks in a park at a business district in Seoul, South Korea, March 23, 2016. Picture taken on March 23, 2016. REUTERS/Kim Hong-Ji

The shock contraction boosted money market bets that the central bank is likely to make a U-turn on policy soon, shifting to an easing stance and possibly cutting interest rates to counter waning business confidence and growing external risks.

A worse-than-expected downturn in the memory chips sector hit first quarter capital investment, while falling exports offset gains from private consumption, the Bank of Korea said on Thursday, echoing strains in other trade-reliant Asian economies.

Gross domestic product (GDP) in the first quarter declined a seasonally adjusted 0.3 percent from the previous quarter, the worst contraction since a 3.3 percent drop in late 2008 and sliding from 1 percent growth in Oct-Dec.

None of the economists surveyed in a Reuters poll had expected growth to contract. The median forecast was for a rise of 0.3 percent.

“Government spending failed to keep up the bumper boost of the fourth quarter, especially for construction investment, while a drop in business investment was worse than expected due to a downturn in the chips sector,” a BOK official said, adding there was also a strong base effect after solid fourth-quarter growth.

From a year earlier, the Korean economy grew 1.8 percent in the January-March quarter, compared with 2.5 percent growth in the poll and 3.1 percent in the final quarter of 2018.

South Korea’s main stock index fell 0.4 percent after the data, while the won weakened to its lowest since early 2017.

June futures on three-year treasury bonds rose 0.15 points to 109.58 while the nation’s three-year bond yields fell below the benchmark interest rate of 1.75 percent again, in a sign that rate-cut expectations are rising to put an end to the bank’s tightening cycle that began in 2017.


Kong Dong-rak, a fixed income analyst at Daishin Securities, said he may push forward his rate cut call from the fourth quarter to sometime earlier this year.

“A rate cut won’t come as early as May when policymakers next meet, as it will monitor how the government’s supplementary bill goes at the parliament,” Kong said.

A Reuters poll of 17 economists in mid-April showed a slim majority of nine forecast a rate cut between now and 2021.

The grim data came a day after the Moon Jae-in government unveiled a 6.7 trillion won ($5.9 billion) supplementary budget to tackle unprecedented air pollution levels and boost weak exports.

Capital investment tumbled 10.8 percent, the worst reading since 1998, while construction investment inched down 0.1 percent, the BOK said.

In an urgently called policy meeting to discuss slumping growth, finance minister Hong Nam-ki said global trade spats and uncertainties related to Brexit are delaying major investment decisions by Korea Inc.

“The economy is in difficult situation, but the second quarter will be better than the first, and the second half will be better than the first half,” Hong said.

Exports fell 2.6 percent quarter-on-quarter, a sharper drop than the 1.5 percent decline three months earlier as Korea’s export-focused economy took a hit from fifth consecutive months of shipment declines for China through March, its biggest trading partner.

Shipments out of Asia’s fourth-largest economy contracted for a fourth month in March.

While recent data from China suggest its economy may be starting to bottom out in response to stimulus measures, analysts do not expect a sharp rebound in its import appetite like those seen in past recoveries.

Economists polled by Reuters expect China’s growth to slow to a near 30-year low of 6.2 percent this year, from 6.6 percent in 2018, an April poll by Reuters showed.

One saving grace for Korea in the first quarter came private consumption, which grew 0.1 percent due to a rise in demand for durable goods.

A breakdown of GDP contribution showed net exports by volume boosted growth by 0.2 percentage point in the first quarter, while negative net domestic demand was a 0.5 percent point drag, resulting in a quarterly contraction of 0.3 percent in the January-march period.

While South Korea’s preliminary trade figures are announced in value terms, the BOK accounts for exports by volume.

“There are reasons to think that first-quarter GDP may have marked the bottom in growth, (but) the big picture is that South Korea’s economic performance is likely to be lacklustre in 2019 and any recovery would likely be gradual,” ANZ said in a note, lowering its full-year forecast from 2.5 percent to 2.2 percent.

Reporting by Joori Roh and Cynthia Kim; Editing by Kim Coghill