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South Korea unveils stimulus plans as shock of ferry sinking slows growth

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A woman walks by sale signs at Seoul shopping district, South Korea, Thursday, July 24, 2014. South Korea's government unveiled stimulus plans Thursday after the shock of a deadly ferry sinking slowed economic growth to the lowest level in three quarters. (AP Photo/Lee Jin-man)

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A woman walks by sale signs at Seoul shopping district, South Korea, Thursday, July 24, 2014. South Korea's government unveiled stimulus plans Thursday after the shock of a deadly ferry sinking slowed economic growth to the lowest level in three quarters. (AP Photo/Lee Jin-man)

SEOUL, South Korea - South Korea's government announced a $40 billion stimulus plan Thursday after the shock of a deadly ferry sinking slowed economic growth to the lowest level in three quarters.

The finance ministry said government spending would increase by 11.7 trillion won ($11.4 billion). Another 29 trillion won would be available to small- and medium-sized companies through loans and other financial support.

To stimulate the real estate market, the government will ease mortgage rules that limit household loans for home buyers.

In announcing the stimulus, the ministry lowered its forecast for South Korea's economic growth this year to 3.7 per cent from 3.9 per cent.

A slump in domestic spending crippled growth during the first half while there are uncertainties in the global economy that could slow exports during the second half, it said in a statement.

Earlier Thursday, the Bank of Korea said Asia's fourth-largest economy grew 3.6 per cent from a year earlier in the April-June quarter after expanding 3.9 per cent in the first quarter. That was the slowest growth in three quarters.

From the previous quarter, the economy expanded 0.6 per cent, the slowest pace in more than a year.

The central bank said even though exports continued solid growth, consumer spending turned negative. Consumer spending fell 0.3 per cent, the worst since the third quarter of 2011.

Earlier this month, the bank reduced its forecast for economic growth this year to 3.8 per cent from 4.0 per cent, citing a deadly ferry sinking in the spring that dented consumption.

The April 16 ferry disaster that killed 294 people and left 10 missing shocked South Koreans and left the country in grief for weeks. Massive cancellations of trips followed the tragedy, hitting food, service and entertainment sectors that serve tourists.

The latest growth data likely boost expectation that the Bank of Korea will cut its key interest rate as soon as next month. The bank has kept its benchmark interest rate at 2.5 per cent since May, 2013. One policymaker disagreed with the rate freeze during the bank's July meeting.

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