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South Korea looks headed for its first economic contraction in a decade, the country's president warned, reinforcing expectations of further interest rate cuts and fiscal stimulus to boost Asia's fourth largest economy. The comments by Lee Myung-bak were more pessimistic than the central bank's forecast and follow a series of weak economic indicators that suggested the global downturn, which has sent much of the developed world into recession, was deepening.
"The first and second quarters of next year are seen as the trough (of the economic cycle)," President Lee Myung-bak was quoted as saying on Saturday when two government ministries reported their new year policies. "Given the difficulty in the world economy and South Korea's high dependence on outside markets, we are at a critical moment which may see negative growth in the first and second quarters although the annual number may be positive."
South Korean officials usually refer to annual rates when speaking about economic growth. An analyst said Lee's comments, carried by a pool report, reinforced views that authorities were likely to take further measures to help the rapidly slowing economy from slipping into its first recession since the 1997/1998 Asian crisis.
"Lee's comments indicated the government has accepted the fact that the economic difficulty was more serious than had been thought," said Jun Min-kyoo, an economist of Korea Investment & Securities. "That also signalled the government could be more aggressive in implementing measures to boost the economy.
The economy ministry said on Friday South Korea's economy was in an unprecedented crisis with domestic and overseas demand falling at the same time, but the government will strive to avert an annual decline in 2009 exports. The Bank of Korea has lowered benchmark rates by 2.25 percentages points since early October to a record-low of 3.0 percent. The central bank next reviews interest rates on January 9.
The government has announced a series of measures, including expanded fiscal spending and additional tax cuts, to shore up the economy and has promised to implement more steps if necessary. Earlier in the month, the Bank of Korea predicted a 0.6 percent growth in the first half of 2009 and a 3.3 percent expansion in the second half.
On an annual basis, Asia's fourth-largest economy is expected to grow 2.0 percent next year, slowing from the 3.7 percent growth forecast for 2008, according to the central bank. Despite the slowdown South Koreans did not seem to be bracing for worsening economic conditions, Lee said. "We still see traffic jams on the weekend like in the past after they briefly fell by around 5 percent when oil prices hit $140. That shows we do not feel the size of the difficulty approaching," he said.

Copyright Reuters, 2008

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