Seoul: South Korea’s economy likely posted its weakest growth in more than a year in the June quarter, with a deadly ferry accident hitting consumption and offsetting a modest recovery in exports.

The trade-reliant economy had earlier this year benefited from a pick-up in the global economy, but domestic demand has softened since the ferry sinking in mid-April that has taken a toll on its services industries and tourism.

The Bank of Korea is confident the second quarter will prove to be the trough for Asia’s fourth-largest economy, but the government is less sanguine. It has promised to take action to prop up the property market, while some investors have priced in an interest rate cut as early as next month.

The economy is estimated to have grown a seasonally adjusted 0.7 per cent in the April-June period on quarter, the slowest since a 0.6 per cent rise in the first quarter of 2013, according to the median forecast from a Reuters survey of 27 analysts.

South Korea’s economy grew 1.1 per cent in the third quarter of 2013 and 0.9 per cent each in the following two quarters on a sequential basis. The government views growth of around 1 per cent a quarter as an optimal pace.

“The slowdown deepened since the capsizing of the Sewol, led by the private consumption and service-sector activity, while construction spending and corporate investment were also weak,” said Lee Seung-hoon, economist at Samsung Securities.


The ferry sank on April 16, killing more than 300 people in the country’s worst maritime accident in two decades. That has led to massive cancellations of tour contracts across the country, badly affecting all businesses serving tourists.

Consumer spending was already hurt by a depressed property market, high household debt and slowing job growth. A slowdown in China and some other major economies have also prompted companies to cut spending on investment and new employment.

To bolster the economy, the government plans to announce stimulus measures on Thursday that Finance Minister Choi Kyung-hwan has said would focus on lifting the property market and increasing public spending, although he ruled out a supplementary budget.

Last year, the government rolled out around $5 billion in a supplementary budget spending bill while the central bank cut the policy interest rate by 25 basis points.

Stimulus measures, which have been relied on in recent years to support flagging growth, could help quicken a turnaround which some economists expect to take hold in the third quarter.

Exports grew 3.3 per cent in the second quarter from a year earlier, accelerating from 1.7 per cent in the first quarter, although import growth also quickened to 3.2 per cent from 2.0 per cent, customs agency data showed.

The central bank expects momentum to pick up and has estimated growth of 3.8 per cent for the whole of this year, up from 3.0 per cent in 2013. Governor Lee Ju-yeol, however, said this month that downside risks were increasing.

Treasury bond

Lee has not given any clear guidance on the direction of interest rates but the government’s repeated calls for urgent action by policy authorities has prompted investors to price in high chances of an interest rate cut as early as August.

The 1-year treasury bond yield has tumbled by nearly one-fifth of a percentage point since the finance minister’s call for stimulus sparked speculation of a rate cut.

It ended Tuesday’s session at 2.451 per cent, the lowest close since June 5, 2009, and below the central bank’s current policy interest rate of 2.50 per cent. The Bank of Korea last cut the rate by 25 basis points in May last year.

The central bank next reviews policy on August 14.