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(3rd LD) S. Korean economy grows 2.9 pct in Q3

All Headlines 15:17 October 26, 2009

(ATTN: UPDATES with more details in paras 4,7,9,14-18)
By Kim Soo-yeon

SEOUL, Oct. 26 (Yonhap) -- The South Korean economy grew at the fastest pace in more than seven years in the third quarter on improving domestic demand and robust exports, the central bank said Monday, bolstering optimism about an economic recovery.

The country's gross domestic product (GDP), the broadest measure of economic performance, expanded 2.9 percent in the July-September period from three months earlier, up from a 2.6 percent gain in the second quarter, according to an advance estimate by the Bank of Korea (BOK).

The third-quarter reading marked the fastest growth since a 3.8 percent advance in the first quarter of 2002. Compared with a year earlier, the economy expanded 0.6 percent last quarter, marking the first on-year growth in four quarters.

The BOK said the strong numbers came due mainly to a wrap-up in inventory adjustment and cautiously forecast that the economy may not contract this year if the current trend continues.

"The Korean economy is recovering fast. In the third quarter, the private sector led a recovery," Kim Myung-kee, director general of the BOK's economic statistics division, told a press conference. "But because the third-quarter growth mostly came as destocking was wrapping up, it will take some time for people to feel the economic recovery."

Kim also hinted that the Korean economy may not contract this year compared to 2008 if local economic activity continues to improve and the global economy maintains its recovery phase. The BOK earlier forecast a 1.6 percent contraction in 2009.

"If the economy can pull off positive growth in the fourth quarter compared to the third, this could translate into on-year growth surpassing 5 percent in the October-December period," he added.

Asia's fourth-largest economy is fast emerging from its worst downturn in more than a decade, helped by aggressive fiscal spending and rate cuts. Hit by the global economic recession, the Korean economy tumbled 5.1 percent on-quarter in the last three months of 2008 before rising 0.1 percent in the January-March period.

Earlier in the day, Finance Minister Yoon Jeung-hyun said that the third-quarter growth was a 'surprise," given that the economy still faces many downside risks and cautiously predicted that the Korean economy will post positive annual growth this year.

The data is underpinning optimism that the Korean economy is recovering at a faster-than-expected pace, raising market expectations that Korea may shift into a tight bias faster than other advanced economies.

Exports, which account for about 50 percent of South Korea's GDP, rose 5.1 percent on-quarter in the third quarter, after jumping 14.7 percent in the second quarter.

Private spending, one of the main growth engines of the Korean economy, increased 1.4 percent, compared with a 3.6 percent gain in the preceding quarter.

Facility investment climbed 8.9 percent after rising 10.1 percent in the second quarter, while construction investment declined 2.1 percent, compared with a 1.7 percent expansion three months earlier.

Economists say that despite upbeat economic readings, the central bank is not likely to raise the key rate this year, given lingering uncertainty about the economic outlook.

"The third-quarter economic performance results came as a surprise. But the growth seemed to be aided by inventory effects," said Goh You-sun, an economist at Daewoo Securities Co. "The BOK is expected to keep the rate put this year with any rate hike coming in the early part of next year."

Lee Sang-jae, an economist at Hyundai Securities, said that with lingering global economic uncertainties about sustainable growth, it would be difficult for the BOK to hike the rate in the near term.

After October's rate-setting meeting, BOK Gov. Lee Seong-tae said that the bank will closely monitor economic performances in the fourth quarter, hinting that the central bank would be in no hurry to tighten monetary policy.

The government has reiterated that it is still "too early" to start unwinding emergency measures put in place to stem a sharp economic freefall as the private sector is still not able to grow without state help and asset price hikes are easing.

The governor said on Oct. 15 that the local economy is expected to contract by less than 1 percent this year. Lee downplayed the possibility of the country experiencing a "double-dip" downturn, in which a second downturn follows a short-lived recovery.

The BOK slashed the rate by a total of 3.25 percentage points to a record low of 2 percent between October 2008 and February in an effort to boost the sagging economy.


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