The South Korean economy is at a crossroads as the current quarter is likely to determine whether it makes a full-fledged recovery or remains mired in a protracted slump, local observers said Monday.

Should ongoing efforts to overhaul the pension program for government employees and the labor market make headway, there is a good chance that things will turn around for Asia's fourth-largest economy.

However, the economy could lose momentum and suffer difficulties in making a recovery if the country fails to make meaningful progress in public-, labor-, financial- and education-related reforms that could boost the overall competitiveness of the country, they said.  

The loss of economic traction could be troubling since the government will not be able to pursue policies in an aggressive manner in the second half with general elections looming in April of 2016, according to the observers.

The latest government data show that the economy is showing signs of a recovery after a shaky start.

In February, industrial output for all sectors rose 2.5 percent on-month, the highest monthly gain in four years. Numbers for consumption and business investment were on the mend, thanks in part to the Lunar New Year's that fell in the month.

Such positive developments are backed by the emergence of the "new three lows" -- low interest rates, cheap oil and a weak South Korean currency -- that can fuel spending and investment, and boost export competitiveness.

Low interest rates are expected to increase overall liquidity and ease debt payment burdens for ordinary people and companies, which can fuel spending.

Weak international crude prices are also forecast to cut money spent on imports and lower production costs, with the weak won making locally made products cheaper in foreign markets.

The combination of these changes can prop up the domestic stock and property markets, according to officials and analysts.

Finance Minister Choi Kyung-hwan and other policymakers have said that the recent deal to resolve Iran's nuclear program has removed a key geopolitical risk in the Middle East, providing possible business opportunities for South Korean builders and industrial plant companies.

Statistical officials point out that since overall economic indicators took a beating in the second quarter of 2014 following a ferry tragedy in mid-April, the "low base effect" can clearly boost this year's numbers.

The ferry sinking claimed more than 300 lives, mostly high school students, pouring cold water on consumer demand.

A recent poll conducted by the Korea Institute for Industrial Economics and Trade showed its business survey index in the manufacturing sector hitting 110 for the current quarter. A reading above 100, means there are more optimists then pessimists.

"Major economic indicators are pointing toward recovery and coupled with other factors, it seems unlikely that the economy will backtrack in the second quarter," said Lee Geun-tae, a researcher at the LG Economic Research Institute.

Despite the positive signs, other analysts cautioned that current conditions may be tenuous.

Industrial output edged up 0.1 percent in the first two months of this year vis-a-vis the fourth quarter of last year.

Consumer inflation moved up 0.4 percent on-year in the two-month period, hovering below the 1 percent mark for four months running and raising the specter of still weak consumer spending.

Market watchers also said that with Japan engaging in qualitative easing and the yen falling, the weak Korean won is unlikely to help local exporters boost their price competitiveness in overseas markets.

Pessimists, moreover, said that if no progress is made on wide-ranging economic reforms, the newly found momentum can be lost and cause a weakening of consumer and business confidence about the future.

Another source of concern is a general strike that labor unions have threatened if the government and management push for labor-market reforms without consent from workers, they said. (Yonhap)