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South Korea posts strong first quarter

South Korea posted its strongest quarterly growth in three years, helped by robust exports and construction investment, and increasing the prospect of a rate rise in the second half under the central bank's hawkish new governor.

Gross domestic product expanded 3.9 per cent in the first quarter from a year earlier - the fastest since the first quarter of 2011 and accelerating from the previous quarter's 3.7 per cent rise. GDP rose a seasonally adjusted 0.9 per cent on the quarter in the January-March period - unchanged from the previous quarter, the Bank of Korea said.

South Korea's robust growth contrasts with what has been a rocky start to the year for much of Asia. Growth in the region's biggest economy China slowed sharply in the first quarter of 2014, raising pressure on Beijing to provide a fresh round of government stimulus.

South Korean exports proved resilient, rising 1.7 per cent from the previous quarter on strong demand for electronics and petrochemical products, despite the appreciating won, which has gained 8 per cent against the US dollar over the past year. Construction investment shot up by 4.8 per cent from the previous quarter, lifted by house building.

But domestic demand remained a drag. Private consumption growth slowed to 0.3 per cent on a sequential basis, after a 0.6 per cent expansion in the previous quarter, as high household debt put a damper on spending. Government expenditure dipped 0.2 per cent.

Yet overall the data suggest Asia's fourth-largest economy is on track for a strong recovery this year. The Bank of Korea recently raised its annual growth forecast to 4 per cent from an earlier projection of 3.8 per cent, after leaving its policy rate unchanged at 2.5 per cent for an 11th straight month in April. The South Korean economy grew 3 per cent last year and 2.3 per cent in 2012.

"We believe the economy will continue to expand at a more or less the same pace in subsequent quarters on a proactive fiscal policy alongside the global economic recovery," ANZ Research said in a report.

It expects the country's inflation to remain below the central bank's target of 2.5-3.5 per cent in the first half but to gradually accelerate in the second half to around 3 per cent towards the end of the end of the year, "adding pressure for the BoK to lift interest rates in the fourth quarter."

Lee Ju-yeol, the new BoK governor who took office this month, has forecast that growth will pick up to near potential and inflationary pressure will grow this year, despite weakness in emerging economies and monetary stimulus tapering by the US Federal Reserve.

The BoK may consider raising its interest rate when demand starts to drive inflationary pressure, Mr Lee said earlier this month.

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