Korean economy grows less than expected


The Korean won has gained 9 percent against the U.S. dollar this year alone, putting pressure on major exporters

Staff and wires

SEOUL, South Korea (CNN) -- South Korea's economy rose 1.4 percent in the second quarter, a larger than expected drop from the first three months of the year.

The seasonally adjusted rate is down from 1.9 percent growth for the three months through March, the central bank said on Thursday, as growth in consumer spending and construction slowed.

For the June quarter, economists had anticipated a rise of around 1.6 percent.

"There was a slower increase in construction investment and consumer spending during the second quarter, while growth in facilities investments and exports accelerated," the BOK said in a statement.

U.S. sluggishness likely to hurt exports

Exports have driven the strong start to the year, but are unlikely to play as large a factor in Korea for the rest of the year.

South Korea's largest export market, the United States, saw its economy grow at just 1.1 percent in the second quarter, down from 5 percent in the first.


Walker at CLSA forecasts that Korea will grow faster than China and India over the next two years, leading a surge in Asia

Still, Korea is one of Asia's strongest performing economies. According to forecasts from investment bank CLSA, South Korea will post the strongest growth in Asia over the next two years, its GDP rising 7.3 percent in 2002 and 7.3 percent in 2003.

The bank's chief economist, Jim Walker, said on Wednesday that strong confidence, free-flowing money supply and strong bank lending will generate heavy investment in Korea and Asia in general.

He believes Asia outside Japan will become the driver of the world economy, a mantle the region has not been strong enough to take up before (full story).

Confidence high in Korea

Walker said the sluggish recovery in the United States would hurt export growth. But he said it would not stall Asia's stronger rebound.

"The longer we go without a double dip [in the U.S.], the more secure the legs under the Asian recovery are," Walker said. Confidence is high in Korea, he said, which underpins any economic surge.

Compared with the same quarter last year, Korea's GDP is up 6.3 percent, also slightly less than expected. Trackers believe a strong currency and the likely lag in exports make prospects for the second half of the year more unclear.

"We had expected exports to drive economic growth in the second half, but now we have to worry about a strong won and concerns about the pace of U.S. economic recovery," Kim Giseung, an economist with LG Economic Research Institute, told Reuters.

He believes consumer spending and construction will continue to slow. The central bank has been raising interest rates to prevent Korea from overheating, which has curbed the public's appetite for homes and goods.

Spending rising at a slower rate

Spending is still rising but not as dramatically. It rose 2.0 percent in the second quarter, down from the first quarter rate of 2.3 percent. Construction fell 2.8 percent in the June quarter.

As in Japan, a stronger currency has put pressure on export growth. The won has gained more than nine percent so far this year against the U.S. dollar.

The value of exports in the second quarter rose 11.8 percent from a year earlier, compared to a 1.8 percent increase in the first quarter. The figures were in won terms, however, and the currency rose sharply in that period.

Stocks show modest rise

South Korean stocks are up after the report, the Kospi rising 0.31 percent to 747.46 at noon. But that is in line with a regional jump in stocks.

The Korean won is a little weaker at 1,194.3 to the U.S. dollar, mapping the yen's losses.

Finance Minister Jeon Yun-churl said this week he would stick by 2002 economic growth forecasts. His ministry has forecast GDP growth of over six percent this year.

The BOK has officially forecast 6.5 percent growth for the year. But the central bank has hinted that it may reduce its GDP forecast next month, citing the risk of slower U.S. growth.

South Korea is the world's fourth largest oil importer and analysts also fear renewed armed conflict in the Middle East could chill global investment and trigger international funds to retreat from South Korean markets.