South Korea GDP data add strength to calls for further stimulus

South Korea's economy grew at the slowest rate in two years, further fuelling calls for additional stimulus measures to boost the economy.

Gross domestic product grew a seasonally adjusted 0.8 per cent in the first three months from the previous quarter, following a 0.3 per cent rise in the last quarter of 2014.

While that was slightly above market expectations, annual growth dipped to 2.4 per cent from a year ago, compared with 2.7 per cent growth the previous quarter.

Weak growth momentum adds to pressure on the government to come up with a supplementary budget. Earlier this month, Bank of Korea governor Lee Ju-yeol called on the government to take fiscal measures to stimulate the economy, citing weak public spending as a drag on growth.

The BoK has downgraded its growth forecast for this year to 3.1 per cent from 3.4 per cent, prompted in part by slow public spending after tax revenues fell short of government expectations. The central bank estimates that the government will suffer a tax revenue shortfall of Won6tn ($5.6bn) this year.

Pressure for additional stimulus measures is building as the economy goes through a rough patch. Exports, which have fallen every month this year, decreased 4.2 per cent in March from a year earlier, the biggest drop in two years, hit by cooling demand from the slowing Chinese economy, while inflation hit a 16-year low of 0.4 per cent.

Private consumption remained sluggish, rising just 0.6 per cent in the first quarter, while corporate capital investment was flat. The only bright spot was the construction sector, where investment rose 7.5 per cent following deregulation aimed at boosting the housing market.

Finance minister Choi Kyung-hwan said this week that the government could consider additional stimulus measures in the second half but it was too early to discuss a supplementary budget.

ANZ Research said the latest growth figure was unlikely to prompt the BoK to cut interest rates further for the time being, as the central bank waits for the effects of three interest rate cuts since August to take hold. The BoK cut the base interest rate by 25 basis points in March to a record low of 1.75 per cent.

Raymond Yeung at ANZ Research says policies such as debt restructuring and adjustments to fiscal policy are likely to take the lead in efforts to boost growth, rather than the BoK's monetary policy.

The government is fighting to address the dangers of fast-growing household debt, which stood at more than 160 per cent of disposable income at the end of last year - one of the highest levels of any developed nation. This month the government rolled out a $20bn programme helping homeowners to switch to lower, fixed-rate, amortised mortgages.

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