Economy grows 1.3% in first quarter

The Korean economy grew at a slower pace than previously estimated in the first quarter as weaker domestic demand and sluggish facility investment offset robust exports, the central bank said Wednesday.

The country's gross domestic product (GDP), the broadest measure of economic performance, grew a revised 1.3 percent in the January-March period from three months earlier, down from an earlier estimate of a 1.4 percent expansion, according to the Bank of Korea (BOK).

Compared with a year earlier, Asia's fourth-largest economy expanded at the same 4.2 percent pace as earlier forecast, the bank added.

The BOK said that overseas shipments remained brisk in the first quarter, led by semiconductors and automobiles, but consumer spending and facility investment performed worse than previously estimated.

"Despite weakness in capital and construction investments, robust exports led the overall growth in the first quarter," Jung Young-taek, director of the BOK's national accounts division, told reporters.

Jung said that sluggish construction investment mainly came as the government focused on curbing the spread of foot-and-mouth disease, reducing its investment in social infrastructure. A delay in investment by tech firms made capital spending remain sluggish last quarter.

"Although the growth figures were revised down, the Korean economy is seen as staying on the (solid) growth path. If investment in social infrastructure revives, the domestic demand is likely to pick up," Jung said.

The Korean economy has logged positive growth for nine straight quarters, indicating that the local economy is on a relatively solid growth track. But the BOK earlier said that the pace of quarterly growth is forecast to slow to 1 percent in the second quarter, underpinning the view that its tightening cycle will be gradual in order not to hurt the growth momentum.

The data came two days before BOK policymakers are set to hold a monthly rate-setting meeting. Despite the solid quarterly growth, the central bank is widely expected to freeze the key rate at 3 percent for the third straight month on Friday due to lingering economic uncertainty.

"Industrial output numbers remained lackluster in April and the recovery pace of domestic demand is sputtering. There is a chance that the second-quarter economic growth may cool to below 1 percent," said Park Sang-hyun, an economist at HI Investment & Securities Co.

"The BOK is likely to leave the rate unchanged this week and it may raise the borrowing costs once in the third quarter as inflation risks persist, given expected hikes in public utility charges."

A batch of sluggish U.S. data has ignited debate over whether the U.S. economy is in a soft patch or is heading into another economic recession. A soft patch refers to a period of economic slowdown amid a larger trend of economic growth.

Volatility of global financial markets has increased ahead of the Federal Reserve's planned end of a $600 billion asset-buying program at the end of June. Fears about Greece's potential debt restructuring have also weighed on the global markets.

Amid economic uncertainty, South Korea is facing inflation risks as the country's consumer prices exceeded the upper ceiling of the BOK's 2-4 percent inflation target for the fifth straight month in May.

The on-year growth of consumer inflation slowed to 4.1 percent in May from 4.2 percent in April. But core inflation, which excludes volatile oil and food prices, rose 3.5 percent last month from a year earlier, the highest in 23 months and quickening from 3.2 percent in April.

Exports, which account for about 50 percent of South Korea's GDP, gained 4.6 percent on-quarter in the first quarter, better than an earlier projection of a 3.3 percent expansion.

Private spending, one of the main growth engines of the Korean economy, rose 0.4 percent, compared with a previous estimate of a 0.5 percent advance.

Facility investment fell 1.1 percent, larger than a 0.8 percent contraction earlier estimated and construction investment declined 6.7 percent, the same as forecast earlier.

Meanwhile, the country's gross national income (GNI), a gauge of measuring the actual purchasing power of the population, declined 0.1 percent in the first quarter from three months earlier, the first contraction in two years.

The bank said deteriorated trade terms, sparked by high oil prices, led the GNI to decline, indicating that in terms of real income, people have yet to feel the impact of the improving economy amid high inflation.

The BOK maintained its 2011 growth forecast at 4.5 percent, but revised up the inflation projection to 3.9 percent this year from an earlier forecast of 3.5 percent.

The government has been targeting around 5 percent economic growth this year while containing inflation at 3 percent, but mounting inflationary pressure is making it hard for the government to attain such goals.

The Korea Development Institute (KDI), a state-run think tank, raised its 2011 inflation outlook for South Korea to 4.1 percent from its previous 3.2 percent estimate, calling for the BOK to actively lift its key rate, given growing inflation risks. . (Yonhap)