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Monday, November 16, 1998 Published at 16:54 GMT

Business: The Economy

Korean growth blocked

Summer strikes at Hyundai were unsuccessful in protesting against job cuts

South Korea's battered economy is likely to suffer another year of severe recession, according to a new forecast from the Organisation for Economic Cooperation and Development (OECD).

The latest Economic Outlook predicts that the Korean economy will only grow by 0.5% in 1999, compared with a forecast of 2.5% growth made in July.

And the economy will shrink by 6.5% this year, the country's deepest recession since World War II.

Unemployment is expected to rise from 7.3% this year to 8.3% in 1999 and 2000.

Could be worse

The OECD said it expected Korea to resume economic growth in 2000, with 4% penciled in, but that there were major uncertainties about that forecast.

"Given the unprecedented size of the exchange rate shock, there are large risks attached to these projections," it said.

Like Japan, Korea's banking sector now suffers from a crisis of confidence, and its capacity to lend "has been reduced by the sharp rise in problem loans."

The credit crunch could result in further bankruptcies, and a further drop in consumer confidence.

But in Korea there is also a militant labour movement that has violently opposed corporate layoffs, which could discourage foreign investment.

The biggest risk, however, was "weakening confidence in response to a fall in other Asian currencies and turmoil in Southeast Asia."

Some positive signs

South Korea did get some positive marks from the OECD for its plans for economic restructuring, which aim to reduce the influence of the country's huge conglomerates, the chaebols, on the economy.

But despite attempts to curb their power, they still account for more than half of Korea's exports.

Korea has also built up record foreign exchange reserves, due to its huge current account surplus caused by the collapse of domestic demand.

And it has successfully negotiated a reduction in its short-term debt, which now amounts to one quarter rather than two-thirds of the total.

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