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South Korea Grows at Fastest Pace in 2 Years

Downtown Seoul
RunPhoto | Photodisc | Getty Images
Downtown Seoul

South Korea's economy expanded in the first quarter at its fastest pace in two years, but the central bank report failed to brighten the prospects for the rest of the year as both consumers and exporters struggle for confidence.

The data showed on Thursday the economy grew a seasonally adjusted 0.9 percent from a weak fourth quarter of 2012. But compared with a year earlier, it grew just 1.5 percent, a pace unchanged from the fourth quarter, which was a three-year low.

The consumer downturn and concern over exports -- the twin engines of the Korean economy -- prompted the new government of President Park Geun-hye to produce a $15.5 billion extra budget and stimulus package earlier this month.

(Read More: South Korean Builders Brace for Losses as Overseas Projects Go Sour)

The package aims to revive an economy that more typically grew at rates of 4 percent or higher before the global financial crisis. A slump in the yen has added to Korean exporters' caution as they fear losing out to their Japanese rivals.

"I think it's hard to say that the economy is turning around as export growth completely halted. Companies are still panicking about poor exports," said Jun Min-kyoo, economist at Korea Investment and Securities.

Corporate investment in plant and other production equipment rose 3 percent, the most in a year, but it was still more than 11 percent lower than year-earlier levels, its sharpest decline in nearly four years on that basis.

Exports appeared more promising, rising 3.2 percent from the fourth quarter and 3.6 percent from a year earlier, the volume-based GDP figures showed. But customs figures, which measure the value of exports, paint a less rosy picture, showing they increased just 0.5 percent from a year earlier.

The latest customs figures show the trend worsened in the first 20 days of April, when exports dropped 3 percent from a year earlier as data from the United States, China and Europe raise fresh concerns about prospects for the global economy.

(Read More: South Korea Sets Modest Stimulus Spending)

The GDP figures showed private consumption fell for the first time in five quarters as Koreans keep a tight hold on their wallets to deal with heavy household debt in the face of a slide in property prices and sluggish exports.

Markets showed a muted reaction to the data.

Caution over Korea's outlook was reflected in comments by Kim Young-bae, chief of the Bank of Korea's economic statistics department.

"The existing forecasts that both upside and downside risks exist in the coming quarters still hold," Kim told reporters.

Ronald Man, an economist at HSBC in Hong Kong, said the figures suggested the central bank, which has resisted political pressure to ease policy, will keep rates on hold "for the time being". It last cut its policy rate - currently 2.75 percent - in 2012.

Uncertain Global Economy Weighs

A Reuters poll had produced median forecasts for growth of 0.6 percent on a quarterly basis and 1.4 percent on an annual basis, after rises of 0.3 percent and 1.5 percent, respectively, in the final quarter of 2012.

(Read More: Abenomics Anxiety Doesn't Last Long for South Korea)

A separate poll forecast 2013 growth at 2.8 percent.

Private consumption generates more than half of the annual output of Asia's fourth-largest economy, but it is dependent on investment and employment by big export firms such as technology giant Samsung and carmaker Hyundai Motors.

Underlining the caution on the prospects for the Korean and global economy, Samsung announced in late January it would keep its annual investment spending unchanged at 2012 levels as demand for computer chips wanes and the smartphone market slows.

Hyundai Motor in January reported a surprise 5.5 percent fall in quarterly net profit in part because of a strong won, warning that the weaker yen will hurt its price competitiveness.

Adding to the uncertainty over the prospects for Korean companies, especially export firms, business surveys showed on Tuesday that North America, Europe and Asia lost some momentum this month.

Contact World Economy

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