July 23, 2020 / 2:22 AM / 21 days ago

UPDATE 3-S.Korea enters recession as exports plunge by most since 1963

* S.Korea Q2 GDP posts sharpest contraction since Q1 1998

* S.Korea's recession is first since 2003

* Q2 exports drop 16.6% q/q, worst since 1963

* Private consumption resilient, helped by cash handouts (Adds context, details)

By Cynthia Kim and Joori Roh

SEOUL, July 23 (Reuters) - South Korea plunged into recession in the second quarter in its worst economic decline in more than two decades as the coronavirus pandemic battered exports and social distancing curbs paralysed factories.

Asia's fourth-largest economy shrank by a seasonally adjusted 3.3% in the June quarter from three months earlier, the Bank of Korea said on Thursday. That is the sharpest contraction since the first quarter of 1998 and steeper than a 2.3% fall seen in a Reuters poll.

South Korea joins Japan, Thailand and Singapore in technical recession, defined as two straight quarters of decline, as the pandemic slams Asia's trade-reliant economies.

However, analysts and policymakers are looking at the prospect of a recovery that would be faster than those of its regional peers.

"It's possible for us to see China-style rebound in the third quarter as the pandemic slows and activity in overseas production, schools and hospitals resume," South Korean finance minister finance minister Hong Nam-ki said after the data was released, referring to China's return to growth in the second-quarter after a deep slump earlier in the year.

South Korea's gross domestic product fell 2.9% in year-on-year terms, the biggest fall since the fourth quarter of 1998 and worse than a 2.0% decline seen in the poll.

Exports, which account for nearly 40% of the economy, were the biggest drag on growth, dropping by 16.6% on-quarter to mark the worst reading since 1963.

South Korea's POSCO, the world's fifth-biggest steelmaker, reported an 84.3% drop in operating profit in the second quarter as global demand for steel plummeted.

On Thursday, the world's No. 2 memory chip maker SK Hynix warned of uncertainty in the second half, even as its second-quarter operating profit tripled.

"While consumer spending should gradually recover, the threat from the virus is unlikely to fade entirely and some social distancing will probably have to remain in place," Capital Economics Asia Economist Alex Holmes said.

"Meanwhile, global demand is only likely to recover slowly which will weigh on the export recovery."

South Korea has reported almost 14,000 infections and around 300 deaths since the start of the outbreak, relatively low numbers by global standards although the economic disruptions have been significant.

Construction investment fell 1.3% quarter-on-quarter, while capital investment declined 2.9%.

Output from manufacturing and the service sector fell by 9.0%, and 1.1%, respectively.

One saving grace has been a 1.4% gain in private consumption from three months earlier, thanks to government cash handouts that boosted spending on restaurants, clothes and leisure activities.

The government has rolled out about 277 trillion won ($231 billion) worth of stimulus to fight the economic fallout from the pandemic so far. However, policymakers have little control over the global demand for the country's exports, which includes everything from memory chips to cars to petrochemical products.

"The worst seems to be over. The base effect and fiscal injection from supplementary budget will improve investment," said Park Sang-hyun, an analyst at HI Investment & Securities.

For the whole of 2020, analysts see the economy declining by a median 0.4%, which would be the first full-year contraction since 1998. But the International Monetary Fund estimates an even bigger 2.1% contraction.

Last week, the BOK's governor said a downward revision from its previous projection of a 0.2% decline for 2020 was inevitable. (Reporting by Joori Roh; Editing by Sam Holmes)

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