South Korea averts recession, rates likely bottomed

South Korea's economy averted falling into recession in the first quarter as expected due to government stimulus measures, data showed on Friday, reinforcing the market view that local interest rates have bottomed. Gross domestic product for the January-March period rose a seasonally adjusted 0.1 percent over the previous quarter, the Bank of Korea's advanced estimate showed, rebounding after a 5.1 percent loss in the fourth quarter of 2008.
Construction spending, mostly linked to stimulus packages, jumped by the fastest pace in 16 years while private consumption staged a turnaround, offsetting a continued bleeding in the export industries due to the persistent global downturn. Analysts said Asia's fourth-largest economy would not require further interest rate cuts but remained vulnerable to the continued slump in the advanced economies.
"The economy is in much better shape than feared earlier and we may see a faster recovery than expected. This has removed almost all possibility of further interest rate cuts by the Bank of Korea," said Kim Jae-eun, economist at Hana Daetoo Securities.
"A recovery in the Chinese economy will be the main engine for South Korea's economy, while developed countries are likely to remain sluggish." Construction spending rose a seasonally adjusted 5.3 percent in the first quarter over the previous quarter after dropping 3.0 percent and private consumption expanded by 0.4 percent after a sharper 4.6 percent loss, the Bank of Korea figures showed.
Goods exports fell for the third consecutive quarter by 3.4 percent in the first quarter, although slowing from a 12.6 percent quarterly loss in the October-December 2008 period. The government of President Lee Myung-bak has offered some 50 trillion won ($37.01 billion) in fiscal spending and tax cuts and is awaiting parliamentary approval for additional spending of nearly 20 trillion won. The Bank of Korea has cut interest rates by 3.25 percentage points to a record low of 2.0 percent since early October last year, although pausing for two consecutive months to assess the effect of the steep rate cuts.
Its next rate meeting is May 12. Analysts surveyed by Reuters had forecast the GDP would grow a seasonally adjusted 0.1 percent in the first quarter from the fourth quarter of 2008 but fall 4.5 percent over a year earlier. The Bank of Korea said in a statement the economy shrank 4.3 percent in the first quarter over year earlier after a revised 3.4 percent drop in the fourth quarter.