SEOUL -- South Korea's economy unexpectedly contracted in the first quarter, with a sharp decline in manufacturing investment and continued weakness in exports underscoring its worst performance since the height of the global financial crisis.
Gross domestic product for the January-March period fell a seasonally adjusted 0.3% from the previous three months -- the first decline in five quarters and the biggest slump since the final quarter of 2008, the Bank of Korea said on Thursday. The economy grew 1% in the October-December quarter.
The BOK said capital expenditures plunged 10.8%, the worst drop since the first quarter of 1998, during the Asian financial crisis. That followed 4.4% growth in the October-December period. Spending on chip manufacturing equipment and other machinery fell amid weak market conditions in the semiconductor industry. Investment in transportation equipment also declined as airlines cut back on equipment purchases.
Economists cut their economic growth expectations for South Korea in response to the data.
Reflecting the weaker GDP report and recent weaker export data, "we are lowering our 2019 GDP growth forecast to 1.8% from 2.4%, far below the BOK's forecast of 2.5%," Nomura analysts said in a report on Thursday. They said the data "reinforces our view" that the central bank will cut the policy rate by 0.25 percentage point to 1.5% in the fourth quarter and again to 1.25% in the first quarter of 2020.
The downbeat GDP report came a day after the South Korean government unveiled a supplementary budget of 6.7 trillion won ($5.8 billion) to fight the country's hazardous air pollution and to help lift exports.
Hong Nam-ki, deputy prime minister as well as minister of economy and finance, said he will "give 100%" to achieve the government's growth target of between 2.6% and 2.7%.
In a separate note, Nomura said it believes the stimulus measures "will be insufficient to fully offset intensifying economic headwinds," including a housing market correction and the technology sector downturn. A KB Securities analyst echoed this sentiment.
The conservative opposition Liberty Korea Party on Thursday took the opportunity to call out the government. "The failure in the economy is attributable to the wrong policy by the Moon government," it said in a statement
If the economy continues to slump, it will very likely affect a general election scheduled for next April.
In Thursday's economic report, the BOK said exports fell 2.6% on weak shipments of memory chips, liquid crystal display panels and other electronics. LCD prices have been falling due to higher production levels in China.
Imports swung from a 1.5% rise in the October-December quarter to a 3.3% decline as purchases of machinery and equipment, crude oil and natural gas fell. Construction investment declined 0.1%, due to a slowing of apartment building and public works projects.
Private consumption rose 0.1% thanks to rising sales of household appliances and durable goods. Government spending also rose 0.3%. But those factors were not enough to offset the drop in investment.