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Economy

South Korea grows at slowest annual pace since financial crisis

Economy expands 2% in 2019, but officials paint rosier picture this year

Seoul is optimistic about GDP for 2020, however analysts remain wary, saying government estimates seem based on sentiment rather substance.   © Reuters

SEOUL -- South Korea's economy expanded 2.0% in 2019, down from 2.7% in 2018, as the country suffered from the U.S.-China trade war as well as a slumping domestic semiconductor industry, the Bank of Korea said on Wednesday.

The figure was the lowest since 2009, when the economy grew 0.8% amid the global financial crisis.

The central bank has forecast gross domestic product to increase 2.3% this year amid a slight easing of trade tensions after Washington and Beijing signed a minor trade deal last week. Samsung Electronics and SK Hynix -- South Korea's two largest chipmakers -- are also showing signs of recovery as memory chip prices appear to have bottomed out.

"2019 GDP data was bad compared to 2018 because consumption dropped, investment plunged and exports also declined," said Oh Suk-tae, an economist at Societe Generale in Seoul. But, he added, "government spending blocked it from falling further."

The finance ministry expects the economy to grow 2.4% this year, and Finance Minister Hong Nam-ki said it is vital to maintain at least 2% growth. "The market was worried that we wouldn't grow 2%. But [the 2019 rate] alleviates concerns and sparks confidence in a fuller recovery," Hong said after the BOK announcement.

However, some analysts are wary of government projections for 2020, saying the upbeat estimates are driven more by sentiment than substance.

"We forecast South Korea's GDP to grow 2.0% in 2020," said Marie Kim, an economist at Citi Research. "In our view, [the country's] economic activities remain below their potential, and the positive soft data has yet to be confirmed in real economic activities."

Kim also expects South Korea's export growth to turn positive as early as the first quarter, due largely to poor data last year and an increase in the unit price for semiconductors.

Still, President Moon Jae-in seems to be happy. The liberal leader, who faces general elections in April, wants to paint a rosy picture of the economy this year.

"We see evidence that our economy is improving and turning positive this year," said Moon in a meeting with senior government officials on Monday. "This is because the government has continuously pushed our policy to change the structure of the economy as well as boost economic activity."

Moon noted improved export data, the recovering semiconductor industry and increased orders for Korean ship makers.

The 2020 budget also increased 9.1% to 512.3 trillion won ($438.4 billion), with a focus on social welfare, job creation and education. While still pushing for overall welfare reform, the government has begun to prioritize economic growth.

The expansionary budget emphasizes industry and infrastructure to counter weak private investment.

Spending earmarked for industry, energy, and small and medium enterprises jumped 26.4% to 23.7 trillion won from the previous year, marking the highest rate of increase. This was followed by a 21.8% increase in the allocation for the environment and 18% for research and development.

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