(Adds markets, exports data, analysts, backgrounds)
By Cheon Jong-woo
SEOUL, Jan 21 (Reuters) - South Korea's economy will grow just 0.7 percent this year, the slowest since the Asian financial crisis a decade ago, hit by the deepening global downturn, the country's top government research agency said on Wednesday.
The Korea Development Institute's (KDI) latest forecast, the lowest among the big government agencies, was a sharp downgrade from its previous projection for 3.3 percent growth set in November and stood below the central bank's 2 percent growth forecast made in December.
Separate data showed exports shrank about 30 percent in the first 20 days of January, more evidence that the worldwide downturn is battering the country.
The forecast and the export indicator deepened fears Asia's fourth-largest economy was heading for its first contraction since the 1997/98 Asian financial crisis, analysts said.
"The KDI's figures seem too optimistic as the economy definitely appeared to contract in the fourth quarter, and given other economic data," said Park Sang-hyun, chief economist at HI Investment & Securities.
"Stimulus packages at home and abroad may take effect from the second half, but they are expected to be a just short-term pain killer, not a fundamental solution," he added.
A rising number of private-sector experts expect South Korea's economy to contract by as much as 3 percent this year, with ratings agency Standard & Poor's on Wednesday setting its growth forecast at zero.
The government has introduced fiscal stimulus and tax cuts worth around a combined $100 billion, some 15 percent of the country's annual gross domestic product. The central bank has also cut the policy interest rate to a record-low 2.5 percent from 5.25 percent where it was at the beginning of October.
The Bank of Korea is expected to lower rates further, probably to as low as 1.5 percent in the first quarter, and it may cut them more in the second half, analysts said.
After the KDI forecasts, the March treasury bond futures rose as much as 30 ticks.
"The economy is seen entering a recession phase on weaker domestic demand and as the impact of a sharp slowdown in the global economy bites into exports," the KDI said in a statement.
JOBS AT RISK
The slowing economy, along with corporate restructuring, is expected to hit the job market hard as the economy needs to grow about 5 percent to prevent further job loss, economists said.
"The employment environment will get much worse until next year as job markets usually lag the overall economy. We may see a jobs recovery in 2011 at the earliest," said Oh Suk-tae, an economist at Citigroup.
South Korea's economy was estimated to grow 3.7 percent in 2008, the central bank said in December, after expanding an average of 4.4 percent a year between 1998 and 2007.
The economy has expanded for the past 10 successive years after shrinking a some 7 percent in 1998 in the aftermath of the Asian financial crisis, which had pushed the country to the brink of economic collapse.
Underscoring the impact of global recession in Asia, Singapore's government slashed its economic growth forecast for 2009 to as low as minus 5 percent on Wednesday from the previous projection for as low as minus 2 percent.
The KDI's revised forecasts came a day before the Bank of Korea is due to release its first official GDP growth estimate for the fourth quarter of 2008 on Thursday.
Economists polled by Reuters estimated South Korea's GDP to have contracted a seasonally adjusted 2.7 percent in the October-December period from the third quarter, which would mark the biggest quarterly loss since early 1998. ($1=1373.4 Won) (Editing by Keiron Henderson & Jan Dahinten)