"The third-quarter figure is consistent with the idea that the downturn has bottomed out," said David Cohen, a senior economist at Standard & Poor's/MMS in Singapore.

"Clearly, the data underscores that things were not deteriorating much in the third quarter from the previous quarter."

The annual contraction followed real gross domestic product growth of 6.1 per cent in the year to the third quarter of 1997, the central bank, the Bank of Korea, said.

Sluggish domestic consumption and investment, coupled with slower export growth, were responsible for the sharp contrast, the central bank said.

Economists stressed there was a big distinction between the economy's bottoming out and its recovering.

"We will see signs of recovery some time in the latter part of the secondquarter next year," said Yi Seung-gook, head of research at Hannuri Investment Securities.

"But for ordinary people, it would take them more than one full year to feel any type of recovery."

Hannuri saw 1999's GDP up 1.3 per cent on this year's.

Third quarter private consumption was down 12.0 per cent on a year earlier, with household spending on automobiles, home appliances, clothes and shoes falling sharply, the bank said.

Manufacturing production fell 7.9 per cent annually as manufacturers cut output in the face of declining domestic consumption.

The bank said fixed capital investment dropped 28.3 per cent in the period, led by 46.3 per cent and 15.8 per cent declines in facilities and construction investments, respectively.

Although most sectoral data were in line with expectations, export growth caught the eye of economists.

Exports of goods rose 11.1 per cent during the year to the third quarter, due mainly to a pick-up in exports of steel, semiconductors, ships and clothes.

Exports hadgrown 18.8 per cent in the year to the second quarter and showed 36.8 per cent annual growth in the third quarter 1997.

"The slower export growth will impede the recovery of the economy," said Oh Suk-tae, an economist at Citibank in Seoul.

Economists said Korea's exports were suffering due to the won's appreciation against the dollar and a global economic downturn.

Despite talk of economic recovery, non-performing loans (NPLs) held by South Korean commercial banks remained burdensome at the end of September.

The Financial Supervisory Commission said on Wednesday NPLs totalled 22.42 trillion won ($17.92 billion) at the end of September, compared with 29.08 trillion won at the end of June.

Economists said the drop was misleading.

"There appears to be a drop but there isn't because the state-run Korea Asset Management Corp bought 13 trillion won worth of bad loans in that period," said Oh of Citibank. "So NPLs have actually increased."

NPLs are loans on which neither interest payments nor principalrepayments have been made for the last three months or longer.