Troubled Korea flirts with recession

In this story: Weak private, corporate spending Still growing Positive outlook RELATED STORIES, SITES

By staff and wire reports

SEOUL, South Korea -- South Korea's economy is tipped to show a contraction for the final quarter of 2000, amid falling exports and flat internal spending.

Economists believe fourth quarter gross domestic product numbers, due for release Tuesday, will show the South Korean economy shrank by 1 percent in the three months to December 31 2000.

They say falling exports, spiraling corporate debt, subdued domestic demand and weak investments have conspired to create the first quarter on quarter contraction in the economy since the Asian financial crisis in 1998.

A survey of 10 research houses by Reuters shows an average forecast for fourth quarter gross domestic product (GDP) growth of negative 0.9 percent.

"It's not in good shape; the major problem is the slowdown in exports," says JPMorganChase regional economist Keon Lee.

"Korea is a tech exporter, and the slowdown in the global demand for electronics has really hit hard, especially in cutting production and manufacturing in Korea."

Weak private, corporate spending

Lee says other factors weighing on the Korean economy are a steep fall in private and corporate investment -- the latter being cut back because of spiraling debt in the private sector, which now is close to equal the nation's entire national output.

"The debt problem has been around for a while, but it has been outweighed by the electronics boom. Now there is a slowdown in the tech sector the debt problems are becoming more important," says Lee. "I think we will see very slow growth in 2001."

Most economists expect Korea to record year on year growth of between 5 percent and 6 percent for the December quarter 2000, which is historically low for an economy that prospered on its enormous manufacturing base.

Growth of less than 6 percent would mark the slowest expansion for Korea since the Asian financial crisis.

Electronics are a major driver for Korea's economy as they account for about 35 percent of total exports.

"During the fourth quarter, production -- representing 35 percent of GDP -- contracted 3.2 percent in the wake of a sharp downturn in the chip sector," said Oh Suk-tae, an economist at Citibank in Seoul.

Still growing

Annual 2000 GDP growth would still come to 9.1 percent, marking two consecutive years of sturdy rises after the crisis swept the country, the Reuters poll found.

But economists remain downbeat on South Korea in the short-term, as the U.S. economy continues to show signs of slowing and Japan wallows in the mire of an economic and political crisis.

"Korea is in big trouble," one economist, who wished not to be named, told CNN. "Corporate debt is weighing the country down, it's more than two times that of the U.S. in percentage terms."

Many of the giant trading companies, such as Ssangyong, Hyundai and Daewoo, on which Korea became a manufacturing powerhouse, have crumbled.

Daewoo's debt-ridden automobile offshoot on Monday announced plans to slash 6500 jobs at its overseas plants before the end of June 30, having already sacked 1750 workers at its domestic plants -- leading to riots between striking workers and police.

Positive outlook

Earlier, National Statistical Office said Korean households were more positive in February about their spending in the next half-year than they were in January.

A quarterly survey by the BOK showed companies expect the economic slowdown to moderate in the second quarter of 2001.

"There's a 50:50 chance the economy will bottom out in the first quarter (of this year)," said Lim Ji-won, an economist at J.P. Morgan who predicted a 0.9 percent fall in quarter-on-quarter growth for the fourth quarter.

"But it's still too early to say a firm recovery, as downside risk is lingering from renewed weakness in the U.S. economy as well as Japan's bleak economic outlook," Lim said.

The central Bank of Korea has forecast GDP growth this year of 5.3 percent, after an estimated 9.3 percent in 2000 and a post-crisis surge of 10.7 percent in 1999.

Reuters contributed to this report.

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