SEOUL: South Korea unveiled a $40 billion stimulus package on Thursday as the finance minister warned of a risk of recession after the economy grew at its slowest rate for more than a year in the second quarter.

Citing sluggish domestic demand in the wake of a devastating ferry disaster in April, the finance ministry cut its forecast for economic expansion in 2014 to 3.7 from 4.1 per cent.

The stimulus plan of 41 trillion won ($40bn) includes 11.7tr won in expanded fiscal spending and 29tr won in extra financing support.

The lion’s share will be spent in the remainder of this year, with 3tr won earmarked for the beginning of 2015, the ministry said in a statement.

“Our economy now stands at a critical crossroads between making a leap forward and falling into a recession,” Finance Minister Choi Kyung-Hwan was quoted as saying by the Yonhap news agency.

“A slump in domestic demand is deepening, and the economy is losing its momentum,” Choi said. “The new economic team will do its utmost to break this slumping domestic demand cycle and stabilise people’s livelihoods.” The government also said it would ease mortgage rules and provide tax benefits for businesses that use their cash reserves for wages and dividends in order to spur economic activity.

“We will run our fiscal stance in an expansionary manner during the second half and in 2015 so as to consolidate the base for economic recovery,” the ministry statement said.

“The expansionary stance will be in place until its impact materialises,” it added.

The stimulus package was announced just hours after the central Bank of Korea released second quarter figures showing the economy posting its slowest growth in more than a year, partly due to sluggish consumer spending following the Sewol ferry tragedy.

Gross domestic product rose a seasonally adjusted 0.6pc in the April-June period from the previous quarter, the bank said.

It was the slowest growth since the first quarter of 2013 and missed market expectations of around 0.7pc.

Published in Dawn, July 25th , 2014