South Korea’s economy grows 2.3% in second quarter

South Korea’s economy recorded its strongest growth in 5 1/2 years in the second quarter as increased government spending and record low interest rates insulated it from the global recession.

Asia’s fourth-largest economy expanded 2.3 percent in the three months ended June 30, the Bank of Korea said Friday in a report. South Korea joins Singapore and China among the Asian nations that have released stronger growth figures in recent weeks — another sign the region is emerging from the world’s worst downturn in decades.

There are doubts, however, whether South Korea and Asia’s upturn will be sustained once the effects of government pump priming wear off.

Kang Chang-ku, an economist at the central bank, said the last time GDP grew more was in the fourth quarter of 2003 when it expanded 2.6 percent. The second quarter figures are preliminary and may be revised.

The expansion marked the second straight quarter of growth for Asia’s fourth-largest economy after a contraction in the last quarter of 2008. It eked out a 0.1 percent gain in the first quarter after a contraction of 5.1 percent in the previous quarter.

China’s economy, the world’s third largest, grew 7.9 percent in the second quarter from a year earlier, accelerating from an expansion of 6.1 percent in the first. Singapore, meanwhile, grew for the first time in a year, its economy surging an annualized 20 percent in the second quarter.

Kwon Goohoon, economist at Goldman Sachs in Seoul, said in a note that South Korea’s growth was “driven by a good mix of strong fiscal stimulus, a weak KRW (South Korean won) and monetary easing.”

He expressed doubt, however, that such a strong performance would be repeated the rest of the year as fiscal stimulus wanes and credit expansion slows.

In response to the global financial crisis last year and ensuing economic slowdown, the South Korean government increased spending to spur growth. The Bank of Korea, meanwhile, aggressively cut its key interest rate to a record low 2 percent, where it has stayed for five months.

The central bank said Friday that manufacturing and exports helped boost growth. Manufacturing expanded 8.2 percent in the second quarter while exports grew 14.7 percent.

South Korean exports, which slumped from late last year as consumers overseas cut spending amid the global downturn, have shown signs of improvement in recent months. The country’s trade surplus has been hitting record highs.

But the result was not all good news and showed that some fragility remains. For example, when compared with the same period last year, South Korea’s economy shrank 2.5 percent. That marked the third straight quarter of year-on-year shrinkage.

The last time that happened was in 1998, when GDP contracted from the previous year in all four quarters, said Kang, the central bank economist.

Source: Business Week

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