The South Korean economy will likely expand 2.5 percent next year as a drop in domestic demand and investment will weigh heavily on Asia's fourth-largest economy, a state-run think tank said Sunday.

"The 2017 economy will grow an estimated 2.5 percent as a slight recovery in exports will be offset by a slowdown in construction investment and private consumption," the Korea Institute for Industrial Economics and Trade said in a report.


"But external uncertainties, including the new US government's economic policies, a possible US rate hike, a Chinese slowdown and geopolitical risks will be major factors next year."

The think tank revised up its earlier forecast for 2016 to 2.7 percent from 2.6 percent, noting that the country's gross domestic product grew 2.9 percent through September on the back of brisk construction investment.

It also predicted that exports, the country's main economic driver, will rise 2.1 percent next year on the back of recovered world trade and increased oil prices.

The KIET report said a boom in the local real estate market led by the Seoul government's deregulation drive has contributed to propping up Asia's fourth-largest economy throughout this year, which has been suffering from faltering exports and flaccid consumption.

It expected South Korea's exports, which account for about 30 percent of the country's GDP, to fall 6.9 percent at the end of the year, with private consumption gaining 2.5 percent and facility investment backtracking 3.8 percent.

However, construction investment will likely jump 9.8 percent to counterbalance the decline in exports and facility investment.

The think tank said South Korea's key export items, such as ships, steel and mobile devices, will continue to struggle in 2017 due to a protracted global glut of the sectors, with strengthening trade protectionism expected to put more pressure on the country's exporters. (Yonhap)