By Kim Jae-kyoung
Staff Reporter
The Korean economy recorded the biggest contraction in 11 years in the fourth quarter of last year, spawning fears that the country will undergo a more painful and longer recession.
The Bank of Korea (BOK) reported Thursday that the gross domestic product (GDP) shrank 5.6 percent quarter-on-quarter between October and December, a major setback from the prior quarter's 0.5 percent growth.
The figure was much higher than its earlier forecast of 1.6 percent and the worst performance in a decade since the economy nose-dived 7.8 percent in the first quarter of 1998 when the financial crisis shook the country.
The bleak data suggests that Asia's fourth largest economy is tumbling much deeper and faster than expected, hit hard by the global economic turmoil.
Analysts ruled out the possibility of another economic crisis but warn that the data is well below market expectations. They forecast that the government will deploy more aggressive stimulus measures to minimize the downturn.
``The fourth-quarter data was much worse than expected, dragged lower by weaker domestic demand,'' David Mann, head of Korea Research at Standard Chartered Bank told The Korea Times.
``We expect to see even more aggressive easing policies ― both fiscal and monetary,'' he added. ``This, plus some bottoming out of the global economy by the second half of 2009, should help to support growth improving again by then.''
Morgan Stanley Thursday downgraded its 2009 growth outlook to minus 2.8 percent from an earlier projection of 2.7 percent, citing an anticipated fall in exports. The central bank forecast 2 percent expansion in 2009.
``Right now Korea appears to be in a vacuum where growth can only slow, since exports are plummeting. China is no longer a source of growth, and stimulus measures are not having a meaningful impact yet,'' Morgan Stanley Research Vice President Sharon Lam said.
``Although we still do not expect a crisis in Korea, we see the Korean won remaining weak in the first quarter and possibly testing 1,500 again,'' she added.
Since both internal and external demand are not expected to turn around soon due to the deepening global economic recession, Korea is not likely to see a strong economic rebound this year.
``The upcoming macro data will only deteriorate further and the economy is not likely to bottom out until the second quarter. Strong growth will likely return to Korea, but not in the next 12 months,'' Lam said. She forecast the BOK to cut its policy rate to one percent by the end of the second quarter
Goldman Sachs economist Kwon Goo-hoon said that the scale of contraction is comparable to two major recessions in 1980 and 1998, expecting the policy rate to be reduced by another 50 basis points by March to 2 percent and stay at that level until the end of 2009.
In January, the BOK slashed its key rate by half a percentage point to a record low of 2.5 percent, the fifth reduction in three months. Through five cuts in three months since October, it slashed the key rate by 2.75 percentage points.
On a year-on-year basis, the economy shrank 3.4 percent in the fourth quarter, bringing the annual growth down to 2.5 percent, sharply down from a 5 percent expansion in 2007.
``Slumping exports largely contributed to the fourth-quarter economic contraction. Chances are that 2009 growth will miss the BOK's 2 percent estimate,'' BOK senior economist Choi Chun-sin told a press conference.
Exports, which account for about 60 percent of GDP, the total value of goods and services produced by the economy in a given period, dipped 11.9 percent quarter-on-quarter in the fourth quarter after declining 1.9 percent in the third quarter.
Private spending fell 4.8 percent, compared with the previous quarter's 0.1 percent gain, while facility investment plunged 16.1 percent, after rising 2.1 percent three months earlier.