Economy contracts 0.3% in first quarter
Facilities investment suffers sharpest fall in 21 years
The economy unexpectedly contracted 0.3 percent in the first quarter of the year from the previous three months due to falling private investment and exports, according to the Bank of Korea, Thursday.
The last time the quarterly growth declined was in the fourth quarter of 2017 when it shrank 0.2 percent.
But the 0.3 percent contraction marks the biggest drop since the fourth quarter of 2008 when the economy declined 3.3 percent amid the global financial crisis.
Analysts say the government needs to urgently deploy 4.5 trillion won from its 6.7 trillion won ($5.8 billion) supplementary budget to boost investment and employment.
“The 4.5 trillion won package to support jobs and growth is urgently needed as the continued weakness in the job market and contraction in exports call for a stronger stimulus. On the other hand, the other 2.2 trillion won package to battle air pollution is not likely to stimulate growth directly,” said Alicia Garcia-Herrero, chief economist at Natixis Asia in Hong Kong.
She added the extra fiscal spending would “help” the economy achieve the 2.6 percent growth projected by the International Monetary Fund.
Kim Doo-un, an economist at KB Securities, said, “We cannot rule out the possibility of another extra fiscal budget in the latter half if the economy continues to perform well below expectations.”
Stocks and the value of the Korean won fell, beset by the contraction.
The benchmark KOSPI closed down 10.53 points, or 0.48 percent, at 2,190.50 on foreign and institutional sell-offs. The won’s value lost 9.6 won to close at 1,160.5 won per dollar, surpassing 1,160 won for the first time in two years and a month.
Finance Minister Hong Nam-ki held an emergency meeting in Seoul, calling for the National Assembly to support the supplementary budget, which was submitted for approval Thursday.
He said the shocking and unexpected contraction was due to falling exports on weakening semiconductor prices and shipments amid a global slowdown, noting exports have dropped for four consecutive months.
Exports fell 2.6 percent in the first quarter, led by decreases in outbound shipments of electronic equipment and goods including LCDs.
Facility investment declined 10.8 percent in the same period, the sharpest fall in 21 years,the BOK reported.
The finance minister added his ministry will push to execute the extra spending along with other measures to revive exports, investment and consumption in the second half of the year.
“We will draw up comprehensive economic policies for the second half to ensure the economy improves backed by the extra budget and export measures,” Hong said.
“We ask for the National Assembly’s support for the budget to counter downside risks and create momentum so that the economy can grow 2.6 percent to 2.7 percent this year.”
Given that almost half of the additional budget will be financed from the above-target tax revenue in 2018, while the rest is funded through the issuance of deficit-covering bonds, Garcia-Herrero said Korea has room for extra spending without hurting its fiscal position.
“We don’t think the extra spending will affect the fiscal soundness of the economy. Given that cost of funding is still low in Korea, the additional spending is not likely to put considerable pressure on its fiscal position,” Garcia-Herrero said.
In March, the IMF suggested the finance ministry allocate a supplementary budget, and for the BOK to maintain an accommodative monetary policy to support growth in the face of uncertainty.