By Kim Jae-kyoung
Staff Reporter

The economy grew 2.7 percent from a year earlier in the first quarter, the lowest growth rate in six quarters, as exports slowed and domestic demand remained sluggish.

It is the third consecutive quarter of a drop in growth and the lowest level since the economy grew 2.3 percent in the third quarter of 2003, the Bank of Korea (BOK) said. It’s also well short of the market consensus of about 3.4 percent.

Gross domestic product (GDP), the total output of goods and services, grew 0.4 percent, seasonally adjusted, from a quarter earlier, a setback from 0.9 percent growth a quarter before.

``Besides slower exports, reduced working days and sluggish cigarette output also contributed to lowering growth.’’ BOK director general Kim Byung-hwa said

The central bank said that excluding the cigarette factor, the year-on-year GDP growth would come in at 3.1 percent in the first quarter. In anticipation of rises in cigarette prices, wholesalers hoarded cigarettes, weakening retail sales. Business days were reduced in February because of the extended New Year Holiday.

``The growth figure may look bad, but improvements in private spending and facilities investment are indicative of recovery,’’ he added. ``The recovery is expected to gain momentum from the second half after moving sideways in the first half.’’

Private spending expanded 1.4 percent in the first quarter from a year ago, the second consecutive quarter of gains following the prior quarter’s 0.4 percent rise, while facilities investment grew 3.1 percent. But the gains were offset by sluggish construction investment, which shrank 2.9 percent.

Exports, the sole engine for economic growth over the past few years, slowed to a single-digit growth for the first time in three years, with the growth rate falling to 8.1 percent. The export growth rate was 10.5 percent in the fourth quarter.

Despite the weaker-than-expected first quarter result, the Ministry of Finance and Economy (MOFE) said it would not change its growth target of 5 percent.

``Although the first quarter GDP growth was slower than expected due to the cigarette factor and reduced working days, I don’t think the change was big enough to make us revise our growth goal,’’ MOFE Deputy Minister Bahk Byong-won said.

``I think the economy is now in the middle of balancing itself, as domestic demand is recovering amid a slowdown in exports growth,’’ he added.

Still, analysts said that the disappointing first-quarter result indicates that the economy has yet to get back on track for a full recovery. They suggest that the government draw up a supplementary budget in the second half to boost the recovery.

``The economy has surprised on the downside due to the double whammy of slowing export growth and the oil price shock,’’ ING Group analyst Tim Condon told The Korea Times.

``For now, markets are likely to focus on downward revisions to GDP growth forecast,’’ he added. ``The below-expected first-quarter growth shaves a tenth of a point off our 4 percent forecast.’’

Citigroup senior economist Oh Suk-tae said that given the first-quarter result, it is impossible to achieve the government’s target of 5 percent growth. Citigroup forecast the economy to grow 3.6 percent this year.

``The government should drop its unrealistic goal or lower its target to around 4 percent,’’ he said. ``The government should draw up an extra budget in the latter half to speed up an economic recovery.’’

An analyst at the Samsung Economic Institute echoed the Oh’s view, saying, ``It is inevitable for the government to draw up an extra budget because fiscal and monetary policies have proved ineffective in the first quarter.’’

He stressed that the government, instead, should find ways to encourage local businesses to expand investment by easing regulations and introducing investment promotion policies.

kjk@koreatimes.co.kr