UPDATE 1-S.Korea economy unexpectedly contracts in Q1, worst since global financial crisis

South Korea's economy unexpectedly shrank in the first quarter, marking its worst performance since the global financial crisis, as government spending failed to keep up the previous quarter's strong pace and as companies slashed investment. The shock contraction reinforced financial market views that the central bank is likely to make a U-turn on policy, shifting to an easing stance and possibly cutting interest rates to counter declining business confidence and growing external risks.

A worse-than-expected downturn in the memory chips sector hit first quarter capital investment, while slumping exports amid the Sino-U.S. trade dispute erased gains from private consumption, the Bank of Korea said on Thursday. Gross domestic product (GDP) in the first quarter declined a seasonally adjusted 0.3 percent from the previous quarter, the worst contraction since a 3.3 percent drop in late 2008 and sliding from 1 percent growth in Oct-Dec, the Bank of Korea said on Thursday.

None of the economists surveyed in a Reuters poll had expected growth to contract. The median forecast was for a rise of 0.3 percent. "Government spending failed to keep up the bumper boost of the fourth quarter, especially for construction investment, while a drop in business investment was worse than expected due to a downturn in the chips sector," a BOK official said, adding there was also a strong base effect after solid fourth-quarter growth.

The grim data came a day after the Moon Jae-in government unveiled a 6.7 trillion won ($5.9 billion) supplementary budget to tackle unprecedented air pollution levels and boost weak exports. Capital investment tumbled 10.8 percent, the worst reading since 1998, while construction investment inched down 0.1 percent, the BOK said.

Exports fell 2.6 percent quarter-on-quarter, a sharper drop than the 1.5 percent decline in the previous three months. Private consumption gained by 0.1 percent due to a rise in demands for durable goods.

From a year earlier, Asia's fourth-largest economy grew 1.8 percent in the January-March quarter, compared with 2.5 percent growth in the poll and 3.1 percent in the final quarter of 2018. ($1 = 1,155.2900 won) (Reporting by Joori Roh and Cynthia Kim Editing by Kim Coghill)

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