Seoul: The South Korean economy is showing continued signs of improved consumer sentiment, though production growth remains "gradual" due to a prolonged slump in the construction sector, a state-run think tank said Thursday.

According to Yonhap News Agency, "Recently, our economy has seen continued strength in semiconductors and a recovery in consumption, but production growth remains gradual due to weakness in the construction industry," the Korea Development Institute (KDI) said in its monthly economic assessment.

In January, industrial output fell 1.3 percent from the previous month. Notably, construction output continued to weaken, with the decline widening from 5.5 percent on-year in the previous month to 9.7 percent on-year in January.

Despite sluggish performance in other industries, the KDI said exports have been driven by a sharp increase in semiconductor shipments amid strong demand for artificial intelligence (AI) servers. In February, outbound shipments totaled US$67.45 billion, with chip exports jumping 160.8 percent from a year earlier to a record $25.16 billion.

However, the KDI noted that while the value of exports remains strong, the increase has not yet translated into a significant expansion in production volumes. Consumption, meanwhile, is maintaining a gradual recovery as improved real purchasing power supports spending.

The think tank also warned of growing external uncertainties, citing volatility following U.S. and Israeli strikes on Iran and Tehran's retaliatory attacks in the region. "Amid high uncertainty over developments in the Middle East conflict, there is a possibility that a surge in oil prices could increase upward pressure on consumer inflation," it added.