SEOUL, South Korea — South Korea is moving closer to recession, the government said Thursday, as key indicators worsen amid a shrinking global economy.

"Though the slowdown in inflation continues, declines in production, exports, domestic demand and other real indicators have deepened, increasing the danger of a recession," the Ministry of Strategy and Finance said in a monthly report.

South Korea's economy grew 3.8 percent in the third quarter compared with the same period last year and the Bank of Korea predicts growth will slow to 0.7 percent in the fourth quarter. So the country still isn't close to sliding into a recession, usually defined as two consecutive quarters of economic contraction.

However, economists say that year-on-year growth of anything less than 2-3 percent is considered a cause for alarm in South Korea and signifies that the economy is in deep trouble.

South Korea expanded 5 percent in 2007, while the Bank of Korea says growth probably slowed to 3.7 percent last year and will manage just 2 percent this year.

Some economists, however, say Asia's fourth-largest economy is facing the possibility this year of suffering its first contraction on an annual basis since 1997, when it was in the throes of the Asian economic crisis.

Swiss bank UBS, for example, has predicted the economy will shrink 3 percent in 2009.

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South Korea's export-driven economy has been hit hard by weakening global consumer demand, with industrial production and overseas shipments falling sharply.

Industrial output plunged 14.1 percent in November from the same month the year before, according to government data. Exports fell 17.4 percent in December, following a drop of 18.3 percent in November.

President Lee Myung-bak said last month that the economy may shrink in the first half of 2009, though could still manage to grow for the year.

The ministry's assessment comes a day after the Korea Development Institute, a government-established think tank, offered a similar gloomy view.

"The possibility of economic recession is running high as the domestic demand and exports of the Korean economy fall rapidly," it said in a report.

The government in recent months has announced various initiatives to bolster the economy, including additional spending of 14 trillion won ($10.5 billion) for this year to support low income citizens and local economies, cut taxes and other measures.

On Tuesday, the government said it will invest 50 trillion won ($37.5 billion) over the next four years on environmental projects in a "Green New Deal" to spur growth and create nearly a million jobs.

South Korean stocks fell Thursday, snapping a five-session winning streak. The benchmark Korea Composite Stock Price Index declined 1.8 percent to 1,205.70.

The Kospi fell 40.7 percent in 2008, its third worst performance ever and biggest decline since plunging 50.9 percent in 2000. The index had enjoyed a long bull market, rising for five straight years through 2007.

The Bank of Korea was scheduled to hold a monthly policy meeting Friday, amid expectations it will further slash its benchmark interest rate from an already record low 3 percent. The central bank last month carried out its biggest ever rate cut.