South Korea offers $11bn in stimulus spending

Seoul - South Korea offered billions of dollars in stimulus spending and property market-boosting steps on Thursday to shore up demand after reporting its weakest economic growth in more than a year.

Exports in Asia's fourth-largest economy have benefited less than expected from a pick-up in the global economy this year, but domestic demand has been fragile since a mid-April ferry accident hit tourism and its services industry.

The government rolled out an additional $11.4bn in spending and 26trn won of loans or other financial support, and loosened mortgage borrowing restrictions.

The central bank separately offered banks up to 3trn won to encourage them to expand lending at low interest rates to companies that build factories in the country or buy machinery.

Analysts said the support package was likely to give at least a short-term boost to consumer spending, but warned it could add to household debt levels, already among the highest in the world.

"This is surprising to us in that it marks a shift in policy stance toward debt-driven growth from what was focused more on containing debt," said Young Sun Kwon, economist at Nomura in Hong Kong.

President Park Geun-hye has called for all-out efforts to boost the economy and Finance Minister Choi Kyung-hwan promised to take massive action, which investors believe will pressure the central bank to cut interest rates as soon as next month.

The finance ministry said the stimulus spending would lift this year's economic growth by 0.1 percentage point, but economists said indirect effects such as a potential revival of home prices could help spur household income.

The economy grew 0.6% in the April to June period over the prior quarter, the weakest since the first quarter of 2013 and below expectations for 0.7% growth, data earlier on Thursday showed.

The ministry cut its 2014 growth forecast to 3.7% from 4.1%.

"Serious lethargy"

The latest stimulus package appeared focused on shoring up consumer and corporate sentiment and reviving the property market, compared with the previous one in early 2013, when the government introduced a $5bn supplementary budget that was targeted at more directly lifting growth.

The government in a statement insisted the economy was recovering, but warned that households and companies were in a "serious lethargy" that could become permanent.

South Korean households are under pressure from a heavy debt burden, shrinking property income and slowing job growth. Official data shows income from real estate and financial investment has declined for four consecutive quarters on year.

Housing prices across the country have fallen for six out of the past seven years after adjustment for inflation and dropped 0.5% during the first half of this year, according to data from the country's top mortgage lender, Kookmin Bank.

Rate cut looms

The Bank of Korea data showed private consumption fell a seasonally adjusted 0.3% in the second quarter after edging up 0.2% in the January to March period. Capital investment rose 1.3% after a 1.9% decline.

It was the worst fall in private consumption since the third quarter of 2011 and only the second quarterly loss since then.

The central bank later said that July's consumer sentiment index due on Friday would be "very bad".

The Sewol ferry sank on April 16, killing more than 300 people in the country's worst maritime accident in two decades. That led to massive cancellations of tour contracts across the country, badly affecting all businesses serving tourists.

"In the domestic tourism industry, how the public-sector entities are doing is very important," said Nickey Joo, who runs Air Tours. "All public-sector travelling was cancelled immediately after the accident and that quickly stopped activity in the private sector as well."

Private consumption generates about half of South Korea's gross domestic product but the economy still relies heavily on exporters as their performance has a strong influence on jobs and investment within the country.

The won has also emerged as an important factor for the Bank of Korea's policy as a firmer won cuts profits at exporters and lowers inflation. The won was up 12.9% against the dollar by the end of June from a year earlier.

Some top South Korean companies including SK Hynix , Hyundai Motor and Posco all warned on Thursday of severe and sustained damage from the won's appreciation, which ate into profits earned on overseas sales.

Unusually low inflation also underscores the currency effects and depressed consumer demand. Annual inflation averaged 1.4% for the first six months, below the lower end of the central bank's target band of 2.5% to 3.5%.

Low inflation and the government's call for policy coordination may prompt the Bank of Korea to cut interest rates as soon as at its August 14 meeting. It would mark the first rate cut since May last year, when it also lowered interest rates to support the government's stimulus efforts.

From a year earlier, the economy expanded 3.6% for the June quarter, matching a median forecast of 3.6% in a Reuters poll but slowing from 3.9% in the first quarter.

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