Seoul - South Korea's economy, Asia's fourth-largest, will shrink 2 per cent this year on falling exports and dwindling domestic demand, the government forecast Tuesday, reversing its earlier predictions of growth.

About 200,000 people were expected to lose their jobs because of the effects of the global economic downturn on South Korea's economy, Finance Minister Yoon Jeung Hyun added.

Only in December, the government had predicted growth of 3 per cent.

"As the new finance minister, it is unpleasant for me to offer such a grim view of the economy but I believe that honesty is the first step toward regaining trust in the government from the people and the market," Yoon said at a press conference on the same day he took up his new job.

The government had been criticized for an overly optimistic growth forecast after economists, think tanks and investment banks forecast the first recession for South Korea since the 1997-98 Asian financial crisis.

Early this month, the International Monetary Fund forecast that South Korea's economy would shrink 4 per cent in 2009.

His first priority would be creating jobs by strengthening demand for consumer and investment goods, Yoon said, adding that he also intended to carry out liquidity injections in finance markets, win approval of stimulus measures and carry out deregulation of the service sector.

The former head of South Korea's financial regulator also pledged to submit a supplementary budget plan to the National Assembly by the end of this month. He did not comment on the size of the plan.

The economy of the export-oriented country shrank a larger-than-expected 5.6 per cent in the final quarter of 2008 from the quarter before, according to the central bank. Its gross domestic product fell 3.4 per cent from the same quarter a year earlier. (dpa)