×

South Korea Central Bank Downplays Recovery Talk

South Korea's central bank on Friday downplayed hopes for an early recovery in Asia's fourth-largest economy, saying a rebound in the first quarter owed almost wholly to fiscal stimulus spending.

Korea, Korean Flag
CNBC.com
Korea, Korean Flag

The Bank of Korea said the local economy would have fallen into its first recession -- two consecutive quarters of contraction in gross domestic product -- in 11 years in the first quarter if not for heavy fiscal spending since late last year.

Analysts agreed with the central bank's cautious assessment and said the remarks underscored the market's view that the Bank of Korea would hold interest rates at the current record-low level of 2.0 percent for the rest of this year.

"Without the emergency fiscal spending, we estimate the GDP would have contracted by at least 0.6 percent in the first quarter from the previous quarter," Chung Yung-taek, head of the central bank's national income team, told reporters.

The Bank of Korea's revised GDP data released on Friday showed the economy grew a seasonally adjusted 0.1 percent in the quarter to March after contracting by 5.1 percent in the fourth quarter of 2008.

Government expenditure grew 3.7 percent in the first quarter over the previous quarter while private consumption expanded 0.4 percent, the data showed, indicating the overall GDP growth came mostly from the public sector.

The remarks came as stock markets and emerging-market currencies have rallied in recent months on hopes the global economy has hit bottom and that emerging economies would lead the way to recovery.

South Korea's KOSPI has jumped nearly 40 percent from a 2009 low set in early March while the won has rallied nearly 30 percent against the dollar over the same period.

The central bank and the government joined concerted global efforts to halt the world's economy worst slide in decades, sparked late last year by the collapse of the Wall Street investment banking industry.

The Bank of Korea slashed its policy interest rate by 3.25 percentage points between October and February this year, but has since held it steady in the face of signs that the worst may have been averted.

More From CNBC.com

  • Consumers Poised to Ditch Their Frugal Ways?
  • Dollar Crisis Looming—Don't Short the Market: Rogers
  • Charting Asia: Buggy Whips, GM, Cisco & the Dow
  • More Asia Pacific News

The government of President Lee Myung-bak has also offered a barrage of stimulus packages amounting to more than 5 percent of the country's annual GDP to cushion the impact of the global downturn.

The Bank of Korea forecasts South Korea's economy would contract 2.4 percent for the whole of this year, which would mark the worst performance since a 6.9 percent drop in 1998 in the wake of the Asian financial crisis.