South Korea's First-Quarter GDP Matches Forecasts

Strong domestic demand helped South Korea's economy grow 4% on year in the first quarter, steady from the annual growth rate set in the fourth quarter of 2006 and roughly matching a median forecast for 3.9% in the Reuters poll.

The seasonally adjusted reading from the central bank's advance estimates released on Wednesday matched both the median forecast from a Reuters poll and the quarterly growth rate set in the fourth quarter of 2006.

Private consumption expanded the most in nearly two years during the January-March quarter over the previous three-month period, while the manufacturing sector shrank the most in four years, the Bank of Korea data showed.

Economists said domestic demand has probably bottomed out and would show a moderate recovery for the rest of the year, a view underscoring expectations among investors the central bank may raise interest rates at least once later this year.

"Local consumption seems to have hit a bottom, and domestic demand is expected to lead higher economic growth in the second half, helped by higher Seoul shares, despite some risks such as housing prices," said Park Sang-hyun, chief economist at CJ Investment & Securities.

"The central bank may raise interest rates in the fourth quarter at the earliest when a recovery in domestic demand is confirmed."

Private consumption, which generates more than half of Asia's third-largest economy, rose a seasonally adjusted 1.3% in the first quarter from the previous quarter. The manufacturing sector's output shrank 0.8%.

In all of 2006, GDP increased 5.0%, accelerating from a 4.2% rise in 2005, the Bank of Korea said earlier. But the central bank has forecast growth would ease to 4.4% in 2007 due to slowing demand both at home and abroad.

The budget ministry set on Tuesday the country's economic growth for 2008 at around 5% when it provided a guideline for government ministries in drawing up their annual budget requests.