South Korea economy slows sharply in fourth quarter

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South Korea's economy grew at a sharply slower in the final quarter of 2014 amid a decline in construction spending, initial estimates from the Bank of Korea show.

Month-on-month the economy expanded a seasonally adjusted 0.4 percent in the three months to December, in line with expectations, but sharply slower than the 0.9 percent expansion in the third quarter.

The economy expanded 2.7 percent on year in the fourth quarter, just below expectations for a 2.8 percent increase in a Reuters poll and down from 3.2 percent in the third quarter.

Areas of concern in South Korean markets

"Lackluster sentiment may persist for a while if focus remains on headwinds. Indeed, the relative strength of [the Korean won] vis-a-vis [the Japanese yen] is a serious source of concern," Mizuho Bank analysts wrote in a note.

"However, we expect Korea's economy to remain resilient on three supportive factors. As such, the lagged effects of the monetary and fiscal stimulus should translate in the data in the next quarters," they said.

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"There is a strong chance that [Bank of Korea] may lower its policy rate further (by 25bps to 1.75 percent) to boost consumer and business confidence while at the same time aiming at anchoring inflation expectations," it added. "Overall, we expect GDP to experience a mild pick-up to 3.4 percent [year-on-year] this year, followed by a stronger rebound to 3.9 percent in 2016."

A 9.2 percent on quarter decline in construction spending underlay slower economic growth. Construction spending expanded 2.5 percent in the previous quarter.

However, a 5.6 percent on-quarter increase in capital investment provided some support, rebounding after a 0.5 percent contraction in the third quarter.

For 2014, the economy expanded 3.3 percent, faster than the 3.0 percent posted in 2013.