South Korea’s economy narrowly avoids recession on government stimulus

South Korea stimulus puts recession on hold

SEOUL, South Korea — South Korea’s economy, Asia’s fourth largest, narrowly avoided recession in the first quarter as government pump priming offset a slump in exports but officials still predict a contraction for the full year.

Gross domestic product grew 0.1 percent in the first quarter from the last three months of 2008 when it shrank 5.1 percent, the Bank of Korea said Friday. A recession is usually defined as two straight quarters of contraction.

South Korea is battling its worst downturn since the Asian economic crisis of 1997-98 as exports and industrial production wilt in the face of a collapse in global demand.

The government — along with others in the region — has responded to the slump and rising unemployment with stimulus measures, including spending on infrastructure, tax cuts and a 28.9 trillion won ($21.6 billion) supplementary budget that awaits parliamentary approval. The Bank of Korea, meanwhile, has slashed its benchmark interest rate six times since October to a record low 2 percent to spur growth.

“The bottom line is that the (South) Korean economy escaped a recession by the skin of its teeth in the March quarter,” Daniel Melser, senior economist at Moody’s Economy.com, wrote in an analysis.

Melser cited the impact of increased government spending as the main factor. He said that a stronger-than-expected increase in household spending also contributed, though added that was unlikely to last.

“This does not look sustainable and reflects a dead-cat bounce after the massive drop in consumer spending in the final quarter of last year. Exports and investment are still both very weak and acted as major drags on growth.”

Both the government and central bank forecast that South Korea’s economy will contract on an annual basis in 2009 for the first time since 1998.

Helping spur growth in the first quarter was a 6.1 percent expansion in the construction sector, which rebounded from a contraction of 4.2 percent the previous three months.

Compared with a year earlier, the economy shrank 4.3 percent as capital spending, exports and manufacturing all slumped. Capital spending contracted 22.1 percent, exports 14.1 percent and manufacturing 13.5 percent.

Lim Ji-won, economist at J.P. Morgan in Seoul, said that although manufacturing continued to suffer quarter on quarter, the decline was easing.

“The pace of contraction has decreased quite significantly,” she said.

Manufacturing shrank 3.2 percent quarter-on-quarter after contracting 11.9 percent in the final three months of last year.

South Korea’s economy grew 2.2 percent in 2008, the worst performance since an annual contraction of 6.9 percent in 1998.

Japan, China and India — Asia’s three biggest economies — have also tried to spur growth via fiscal stimulus measures.

China announced last week that growth slowed further in the first quarter, with the economy expanding by 6.1 percent from a year earlier, compared with 6.8 percent the previous three months. But stronger industrial output, retail sales and investment prompted analysts to say the worst of its decline appears to be past.

Premier Wen Jiabao said Saturday that the country’s 4 trillion yuan ($586 billion) stimulus package is “already paying off.”