S Korean economy shrinks faster than expected

By Christian Oliver in Seoul

Published: January 22 2009 02:01 | Last updated: January 22 2009 02:41

South Korea faces a far deeper recession than previously feared, the Bank of Korea said on Thursday, with a collapse in exports causing gross domestic product to contract by 5.6 per cent in the final quarter of last year compared with the third quarter.

As with all of Korea’s indicators in recent weeks, the central bank’s figures undershot analysts’ forecasts and were the worst since the Asian financial markets crisis of 1997-1998.

“There’s no possibility of growth turning positive in the first quarter,” said Choi Chun-shin, director of statistics at the bank.

Exports from Asia’s fourth-biggest economy slumped 11.9 per cent in the final quarter and the bank stressed a particular weakness in semiconductor shipments, mainstay of Korea’s talismanic Samsung Electronics, the world’s biggest maker of memory chips.

Manufacturing plunged 12 per cent and spending from Korea’s debt-ridden private households sagged 4.8 per cent.

Compared with a year earlier, GDP slumped 3.4 per cent in the last quarter. The BoK a had forecast it would shrink by less than half of that, 1.6 per cent.

“This year’s annual growth rate is very likely to be much lower than the BoK’s previous forecast of 2.0 per cent,” Mr Choi said.

Although parts of the government have been producing bullish projections for this year, even hoping that the economy will avoid a recession, international banks such as UBS have been forecasting a contraction for the last two months.

Morgan Stanley on Thursday slashed its forecast for Korea’s economic growth to a contraction of 2.8 per cent over 2009 from an earlier calculation that GDP would grow 2.7 per cent.

Big companies are already feeling the pain. Hyundai Motor and Kia Motors have reduced shifts at production lines and LG Electronics has laid off workers abroad. These companies are all expected to release annual results later on Thursday.

In November, South Korea posted its steepest ever decline in industrial output.

Copyright The Financial Times Limited 2009