Bloomberg News

South Korea Reduces Estimate of Second-Quarter Expansion

September 05, 2012

South Korea’s economy expanded in the second quarter by less than the central bank initially estimated, building the case for another interest-rate reduction as exports wane and confidence slides.

Gross domestic product grew 0.3 percent from the previous quarter, compared with a July calculation of 0.4 percent, the Bank of Korea said in Seoul today. In the first quarter, the expansion was 0.9 percent.

South Korea is balancing the threat from Europe’s debt crisis against the need to preserve fiscal and monetary firepower for any deeper global slowdown. Barclays Capital and Credit Agricole CIB see the central bank cutting the benchmark rate by a quarter percentage point on Sept. 13, adding to a July reduction that was the first since 2009.

“The economy is apparently losing steam and sees no sign of recovery yet,” said Lee Sang Jae, a senior economist at Hyundai Securities Co. in Seoul. “The Bank of Korea will likely come to its aid with a rate cut next week.”

The Kospi Index of stocks rose 0.2 percent as of 9:09 a.m. in Seoul ahead of a press conference today where European Central Bank President Mario Draghi may announce measures to help stem the euro region’s crisis. The benchmark is down about 8 percent from this year’s high in April.

South Korea’s economy expanded 2.3 percent from a year earlier, less than the earlier estimate of 2.4 percent, today’s report showed. Domestic consumption and corporate investment were weaker than initial calculations.

Goldman’s Forecast

“It’s still doubtful whether the worst has passed,” Kong Dong Rak, a Seoul-based bond analyst at Taurus Investment & Securities Co., said ahead of today’s announcement. “Market expectations are pretty high for more fiscal and monetary support, including a rate cut.”

Goldman Sachs Group Inc. cut its estimate for the nation’s full-year growth to 2.6 percent from a previous forecast of 3 percent, the bank said in an e-mailed note today.

While Finance Minister Bahk Jae Wan said Sept. 4 that more economic support measures will be announced next week, he also said that the government favors boosting consumption through deregulation rather than expansive monetary and fiscal policies.

Besides declines in exports, South Korea’s inflation has moderated to a 12-year low, partly because of a high year- earlier base for comparison and free child-care services provided by the government.

“Although the economy is weakening, we’re not looking at a major collapse,” said Lee Jaewoo, an economist at Bank of America Merrill Lynch in Seoul. “If the central bank cuts this month, it won’t be a surprise. Subsequent rate cuts aren’t likely after this one.”

The central bank lowered its main rate a quarter percentage point to 3 percent on July 12, as it joined a global stimulus push from Europe to China.

To contact the reporter on this story: Eunkyung Seo in Seoul at;Cynthia Kim in Seoul at ckim170@bloomberg.netschawn:LINK>

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