SEOUL-- Despite a moderate recovery, the South Korean economy faces increasing downside risks as worsening external conditions hamstring investments and exports, a state think tank said Monday.

Asia's fourth-largest economy has been gathering recovery momentum on robust growth in the service sector, but business sentiment has been hit by policy uncertainties in major economies and continued global supply chain disruptions, the Korea Development Institute (KDI) said in a monthly economic report.

"The economy remains on a recovery path following the easing of COVID-19 social distancing measures, but downside risks are expanding as growth of exports and investments slows due to deteriorating external conditions," the report said.

In mid-April, South Korea lifted most of its social distancing restrictions, including gathering limits and business hour curfews, as part of the country's efforts to return to pre-pandemic normalcy.

The report said worsening global supply chain bottlenecks and high international materials costs have put a dent in South Korea's construction and corporate facility investments, with China's COVID-19 lockdowns further deteriorating external conditions.

South Korea's exports, especially those to China, have thus been growing at a slower rate, with auto and some other industries suffering output disruptions and the country's business sentiment remaining low.

Seoul's overseas shipments rose 12.6 percent in April from a year earlier, slowing from an 18.2 percent on-year surge a month earlier. But surging energy costs sent its imports surging 18.6 percent on-year last month, resulting in a trade deficit of US$2.66 billion.

Dubai crude, South Korea's benchmark, rose to $102.82 per barrel in April on average from $62.92 a year earlier.

South Korea depends mainly on imports for its energy needs.

According to the Bank of Korea, its business survey index came to 86 for may, up three points from the prior month but remaining below the benchmark 100 that separates optimism from pessimism.

The report also said increased financial market volatility stemming from the U.S. Fed's acceleration in rate hikes have been building up downside risks on the Korean economy. Early last week, the U.S. central bank hiked its key rate by the widely expected 0.5 percentage point and is widely expected to carry more rate increases down the road.

Source: Yonhap News Agency