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South Korean economy bounces back in first quarter on exports, government spending

By Cynthia Kim and Dahee Kim

By Cynthia Kim and Dahee Kim

SEOUL (Reuters) - South Korea's economy bounced back last quarter, buoyed by booming exports of data memory chips and a boost from government spending, although private consumption was sluggish.

Thursday's Bank of Korea GDP report showed the economy expanded 1.1 percent in the first quarter, rebounding after contracting by 0.2 percent in the fourth quarter and beating the 1.0 percent forecast in a Reuters poll.

Export volumes, particularly for memory chips and other IT products, gained 4.4 percent and added to growth.

Samsung Electronics <005930.KS>, South Korea's world-leading tech exporter, posted a record quarterly profit of 11.6 trillion South Korean won ($10.75 billion) on Thursday thanks to booming sales of semiconductors used in servers.

The chip boom has offset soft domestic demand and the blow to tourism from diplomatic tensions with China over South Korea's installation of a U.S. THAAD missile defense system.

Private consumption, which accounts for about half of GDP, marked its slowest growth in a year, gaining a mere 0.6 percent from the previous quarter.

The service sector grew 0.9 percent on-quarter, but output of food and lodging services declined 0.9 percent even as South Korea hosted the Winter Olympics in PyeongChang in February-March.

"The food and lodging sector is still suffering from fewer Chinese tourists as part of the THAAD backlash," said Chung Kyu-il, a director general at the Bank of Korea.

"People also went out less due to the cold wave and fine dust issues," Chung said.

Chung said 4.1 percent growth in service sector output from 'cultural activities' reflects a boost from the Winter Olympics, reversing the service sector's 1.8 percent fall in the fourth quarter.

In annual terms, GDP rose 2.8 percent in the first quarter, on par with a 2.8 percent rise in the fourth quarter.

Government spending rose 2.5 percent and posted the fastest quarterly gain in six years, thanks to higher spending on health care.

"The expanded medical benefits boosted government spending, while surging shipments of memory chips are still supporting exports," a Bank of Korea official said.

Park Chong-hoon, an economist at Standard Chartered Bank of Korea, says domestic demand will recover in the second half.

"Exports will continue to lead growth. An increase in the minimum wage will kick in slowly and we could probably see household spending picking up in the second half," Park said.

Even with 17 months of uninterrupted export growth through March, policymakers are navigating the competing concerns of weak domestic consumption and household debt at about 190 percent of disposable income.

With youth unemployment still hovering near record levels at 11.6 percent, scarce jobs and the consequent downward pressure on wages have held back domestic demand.

A 3.9 trillion won ($3.62 billion) government bill proposed to support firms that hire young workers has yet to be approved by the National Assembly.

The central bank expects the economy to expand 3 percent this year, but that estimate is subject to global demand for South Korean memory chips and other manufactured goods in the face of a feared trade war between the United States and China and its potential fallout.

($1 = 1,079.3000 won)

(Reporting by Cynthia Kim; Editing by Eric Meijer)