South Korea’s economy shrank more than estimated in first quarter

South Korea is suffering from the effects of slowing global demand for products like semiconductors.

Counting the Cost - South Korea economy at a crossroads
Falling demand for semiconductors and construction activity led to a bigger economic contraction in the first quarter of 2019 than the government had initially estimated. GDP shrank by 0.4 percent [File: Chung Sung-Jun/Getty Images]

South Korea’s trade-dependent economy shrank more than initially estimated in the first quarter while core inflation slowed to a near 20-year low in May, data showed on Tuesday, adding to the case for the central bank to cut interest rates.

The country’s gross domestic product contracted by a seasonally adjusted 0.4 percent in the January-March period from the previous quarter, the Bank of Korea’s (BOK) revised data showed a notch faster than a 0.3 percent decline estimated earlier.

Exports shrank by 9.4 percent in May as demand for semiconductors, one of its key manufactured products, slumped.

Statistics Korea said separately the core consumer price index, which excludes volatile food and energy prices, rose 0.6 percent in May from a year earlier, slower than the 0.7 percent gain in April and the weakest since a 0.1 percent rise set in December 1999.

“Treasury bond yields have already gone below the policy rate and today’s data, along with the market interest rates, will push the central bank for a rate cut,” Oh Chang-sob, fixed-income strategist at Korea Investment & Securities, told the Reuters news agency.

Both sets of data were released before financial markets started trading.

Gloomy outlook

The BOK’s monetary policy committee held the benchmark interest rate unchanged last Friday but a split vote in the decision was widely interpreted by investors as a central bank signal of a rate cut in the near term.

It next reviews its policy on July 18, when the central bank is also due to release a revised economic growth forecast for this year. In April, the BOK cut its 2019 economic growth forecast to 2.5 percent from 2.6 percent seen previously.

“The most important thing is semiconductor prices, which continue to fall, and that implies any recovery in demand will be difficult even in the second half,” Park Chong-hoon, an economist at Standard Chartered Bank in Seoul, told Bloomberg.

The BOK said in a statement on Tuesday construction investment and exports fared worse than initially estimated in late April, while government spending growth was revised slightly up from the estimate.

From a year earlier, Asia’s fourth-largest economy grew by a revised 1.7 percent during the first quarter, slower than a 1.8 percent rise estimated earlier. 

Source: News Agencies