(Adds central bank official and analyst comments, markets)
By Kim Kyoung-wha
SEOUL, Aug 22 (Reuters) - South Korea's economy, the envy of most Asian neighbours last year, contracted in the second quarter on flagging consumption, sliding into its first recession since the 1998 Asian crisis, the central bank said on Friday.
A central bank forecast for the third quarter implied a strong rebound now under way, although an official was cautious and analysts pointed to ballooning consumer debt defaults and labour unrest sapping private sector spending.
Robust exports driven by a recovering global economy should help in the second half, however, economists said.
"We are looking past the second-quarter number to recent data suggesting a modest recovery ahead," said Lim Ji-won-, an economist at JP Morgan. "But we are still unconvinced about the strength of a recovery given that never-ending labour strikes hamper corporate ability to generate earnings for more spending," Lim said.
The data showed provisional gross domestic product 0.7 percent lower in the second quarter than in the first.
Friday's figure, adjusted to remove seasonal patterns, came in below a Reuters poll forecast for a 0.4 percent drop, but matched the central bank's earlier forecast for a 0.7 percent decline. The reading followed a 0.4 percent drop in GDP in the first quarter.
Financial markets shook off the data. The main South Kroan bourse hit a new 13-month high, driven by a U.S.-led rise in technology stocks, while the Korean won tracked the yen higher. Bonds prices fell, mirroring weak U.S. Treasuries.
FALTERING CONSUMPTION
Private sector consumption was down 2.2 percent in the second quarter from a year earlier, the data showed, due to faltering household spending on durable goods such as air conditioner, refrigerator and mobile phones.
"Geopolitical risks from North Korea's nuclear development and galloping household debt had a far-reaching impact on consumption and investment," Cho Sung-jong, the head of the central bank's statistics bureau, told reporters.
He said third-quarter GDP should be 2.7 percent higher than a year earlier, unchanged from an earlier forecast.
That forecast implied strong seasonally adjusted growth between the second and third quarters of about 1.8 percent -- based on published data for earlier periods.
Cho said exports would be better in the third quarter than in the previous quarter, helped by resilience in the auto and shipbuilding sectors.
However, sounding a note of caution, he said it was not clear whether the economy had hit bottom in the second quarter.
The government has hammered out a stimulus package to spur domestic demand, hit by the North Korean nuclear crisis, a big corporate scandal, soaring household debt and labour unrest.
Extra spending worth 4.2 trillion won ($3.57 billion) is in the pipeline, and law-makers have agreed to cut special excise taxes on luxury goods, including cars. The central bank slashed interest rates twice this year.
Data on Thursday from an association of South Korean banks showed the number of individuals unable to pay back loans hit a record high in July as overstretched consumers defaulted on credit card debt.
Business investment in plants also shrank 0.8 percent in the second quarter from a year ago, versus the first quarter's 1.6 percent gain, the central bank data showed.
Second-quarter GDP expanded 1.9 percent from a year earlier, bringing first half growth to 2.7 percent, less than a half of the 6.4 percent rise in the year-ago period. The Reuters poll had forecast a rise of 2.3 percent. ($1=1175.5 Won) (Additional reporting by Lee Bong-hyun)