Business

South Korea sees economic slowdown

Friday, July 27, 2012    

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SEOUL, South Korea — South Korea's economic growth fell to a nearly three-year low in the second quarter as exports and capital expenditures shrank due to a slowdown in China and debt-saddled Europe, reinforcing views that the central bank will further reduce borrowing costs to prop up the economy.

The Bank of Korea said Thursday in its preliminary estimate that South Korea's economy expanded 2.4 per cent over a year earlier in the three months ended June 30, the slowest growth since the third quarter of 2009.

The second-quarter gross domestic product was just 0.4 per cent higher from the previous three months, when the economy expanded 0.9 per cent.

Asia's fourth-largest economy was widely expected to report weak growth for the April-June period. The central bank unexpectedly cut its key policy rate by a quarter of a percentage point earlier this month, its first rate cut in more than three years.

The surprise easing was seen as a sign that South Korea's export-driven economy will face heightened challenges down the road. Europe appears to be far from resolving its debt crisis and the world's major economies, including key South Korean trading partners China and the United States, are feeling the pinch from Europe's woes.

The slowdown in the second quarter gave more weight to the view that the central bank will lower the benchmark interest rate again before the December presidential election.

The Bank of Korea forecast South Korea's economy to grow just three per cent this year, down from its earlier forecast of 3.5 per cent. An increase in government spending during the second half of this year is expected to contribute 0.2 percentage points to GDP, preventing growth from falling below 3 per cent.

Some analysts predict that the central bank could cut its key rate again as soon as August. Bank of Korea Governor Kim Choong-soo said earlier this month that the July rate cut would help reduce household debt burdens and boost consumption, which is increasingly important for growth as exports wane.

In the April-June period, South Korea's capital expenditures and exports contracted from the previous quarter while growth in domestic consumption weakened.

Capital spending shrank 6.4 per cent from the first quarter due to weak investment in the telecommunications sector. Exports of goods and services inched down 0.6 per cent as demand for petroleum and steel products declined.

Automobile demand contributed to a 0.5 per cent rise in domestic consumption.

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