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S. Korea's economic growth hits over 2-year high in Q2

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(Globalpost/GlobalPost)

By Kim Soo-yeon

SEOUL, July 25 (Yonhap) -- The South Korean economy grew at the fastest pace in more than two years in the second quarter on increased fiscal spending, the central bank said Thursday, underpinning the view that the local economy is on the recovery track.

Korea's gross domestic product (GDP), the broadest measure of economic performance, grew 1.1 percent in the second quarter from three months earlier, quickening from a 0.8 percent on-quarter advance in the first quarter, according to an advance estimate by the Bank of Korea (BOK).

It marked the fastest quarterly growth since the 1.3 percent growth in the first quarter of 2011. From a year earlier, the GDP grew 2.3 percent in the second quarter, accelerating from the 1.5 percent on-year gain in the first quarter.

The on-quarter growth bounced back to the 1-percent growth range in nine quarters last quarter. The BOK earlier said that the quarterly growth is likely to reach around 1 percent every quarter into next year.

The central bank recently revised up its 2013 growth outlook to 2.8 percent from its earlier estimate of 2.6 percent as Asia's fourth-largest economy is improving, aided by fiscal and monetary stimulus. The bank's 2014 growth forecast was also raised to 4 percent from 3.8 percent.

The BOK said the expanded government spending contributed to the second-quarter growth, adding that the economic growth will likely pick up in the second half. Government spending grew 2.4 percent after growing 1.2 percent in the first quarter.

"There is not a high possibility that the economic growth would be lower in the second half than in the first half," Jung Young-taek, the director of the BOK's national accounts division, told reporters.

The BOK's optimism is based on the outlook that facility investment is likely to recover in the second half, along with solid performance in the tech sector.

"What's clear is that exports are performing well despite difficulties and the Korean economy is moving stronger than expected," Jung noted.

The government of President Park Geun-hye, now in office for five months, has been ramping up efforts to bolster the economy by unveiling stimulus measures including an extra budget worth 17.3 trillion won (US$15.5 billion). The BOK made the first rate cut in seven months in May in a bid to support the government's stimulus drive.

The growth data, which topped the market expectation, is lending support to market views that the key interest rate is likely to be left unchanged at 2.5 percent for the remainder of this year. More analysts forecast that the BOK's next move may be a rate hike.

"The second-quarter growth was mainly driven by fiscal spending and construction investment. It still remains to be seen whether domestic demand could maintain the recovery momentum," said Lee Sang-jae, a senior economist at Hyundai Securities Co.

"But as external economic conditions are improving, there is a high chance that the key rate will likely be frozen this year and I think the BOK may consider raising the rate after mid-next year."

Finance Minister Hyun Oh-seok said that the second-quarter GDP data can be seen as a good sign for the economic recovery but also remained cautious about excessive optimism.

"As the local economy escaped from the eighth straight quarter of the zero-percent growth, (the government) will strive to pull the economy from the low growth trend," Hyun said.

Signs of the economic recovery are growing, but downside risks to economic growth still linger such as concerns about China's economic slowdown. High household debt is feared to weigh on the economy as interest rates are on the rise amid the Federal Reserve's stimulus tapering speculation.

The local economy is also underperforming its long-term potential growth of some 3.8 percent. In 2012, the Korean economy advanced 2 percent, the slowest growth in three years.

Exports, which account for around 50 percent of the GDP, gained 1.5 percent on-quarter in the second quarter after growing 3 percent on-quarter in the previous quarter.

Private spending rose 0.6 percent on-quarter last quarter after contracting 0.4 percent in the first quarter, the BOK said.

Facility investment declined 0.7 percent last quarter after gaining 2.6 percent three months earlier and construction investment advanced 3.3 percent, compared with a 4.1 percent on-quarter expansion in the previous quarter.

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