Is South Korea Already in Recession?

South Korea's top state-run agency said on Thursday Asia's fourth-largest economy might
already be in recession, cementing views that the authorities would take more steps, including further rate cuts, to revive the economy.

Growth in South Korea's credit card usage hit a near five-year low in January, separate data showed, and analysts predicted further slowing in anticipation that consumer demand will be unable to offset tumbling exports -- long the mainstay of the economy.

CNBC.com

The glum data released by the finance ministry comes amid a media report citing finance ministry sources that the central bank has cut its 2009 economic growth forecast to 0.3 percent from a projection of 2 percent made in December.

The International Monetary Fund warned on Tuesday that South Korean economy could shrink sharply this year.

"The recent data is so disappointing. The Bank of Korea is more likely to slash 50 basis points rather than just 25 basis points next week," said Kim Jae-eun, an economist at Hana Daetoo Securities.

After the gloomy data and remarks, March Treasury bond futures rose 8 ticks to 111.73 in the Asian session, after falling as much as 16 ticks earlier.

The central bank has already more than halved its policy rate over the past four months to a record low of 2.5 percent. Its next review is on Feb. 12.

The value of credit card usage in January rose 3.9 percent, the slowest growth since June 2004, the finance ministry said in its Green Book report of preliminary economic indicators.

The credit card delinquency ratio, reported by five key card issuers, rose a preliminary 3.43 percent as of end-December from 3.28 percent by end-September, the first quarterly rise in five years, according to a financial regulator.

"Credit card usage growth will inevitably fall more. People usually buy goods with debt when they see any sign of an economic recovery. But we have no such sign yet," said Park Sang-hyun, chief economist at HI Investment & Securities.

Recession Talk
     
The government-run Korea Development Institute (KDI) said the economy might be a recessionary phase as the global downturn bit into exports and domestic demand.

The economy suffered its second-biggest fall on record in the final quarter of 2008, the central bank data showed last month.

The KDI's comments came as more international organisations and investment banks forecast an economic contraction this year, the first since 1998 when the country was hit by the Asian financial crisis.

On Tuesday, the IMF forecast a 4 percent contraction this year. Hong Kong-based broker CLSA expects 7 percent shrinkage this year.

Last month, the Bank of Korea's governor warned that the economy may miss the central bank's 2 percent growth forecast.

Exports and imports are expected to contract again in February after foreign sales suffered their biggest-ever drop of 32.8 percent last month, the finance ministry said.

The current account in January is seen posting a deficit on a trade shortfall of $2.97 billion, the ministry said.

With exports slowing, a financial regulatory official said the country might face foreign currency liquidity shortages again.

"We should not see the problem of foreign currency liquidity as completely solved. We should be vigilant on that," Financial Services Commission Deputy Chairman Rhee Chang-yong told Reuters.

More From CNBC.com

• Cisco Tops Forecasts but Sees Sales Slackening
• Visa Beats Street Expectations; Shares Jump
• Panasonic Warns of Loss, Will Cut 15,000 Jobs
• BHP Billiton Girds for Tough Medium Term
• More Asia Pacific News

Consumer goods sales are also likely to remain sluggish in January, given weak consumer sentiment, although the Lunar New year holidays probably helped lift sales, it added.

Sales at big department stores in January rose an estimated 10.2 percent from a year ago, compared with a 3.2 percent fall in December, according to the Green Book.

Copyright 2009 Reuters. Click for restrictions.