The latest projection by the Korea Development Institute (KDI) is higher than the 5.5 percent expansion it predicted in November last year and even better than the government's outlook of a 5-percent advance. Last year, Asia's fourth-largest economy grew 0.2 percent, hit by a global downturn.
"Our economy is in a stabilizing phase driven by continuing robust exports and expanding domestic demand. With the global economy expected to make a relatively stable recovery, the Korean economy is also expected to remain on its growth track," the KDI said in a report.
"As exports will remain strong and domestic demand improves, centering around private-sector consumption and corporate investment in facilities, the economy will post a significantly high growth of 5.9 percent this year," it added.
The think tank also predicted the Korean economy will expand 4.4 percent next year. The rosier outlook is based on the assumption that the global economy will grow around 4 percent and crude oil will trade at an annual average price of mid-US$80 per barrel.
Private consumption is expected to increase 4.7 percent this year thanks to rising income and improvement in employment conditions, the report predicted. Facility investment will jump 17.6 percent.
The KDI forecast that the nation's jobless rate will stand at 3.7 percent this year with 200,000 more jobs to be created compared with a year earlier. Consumer prices are expected to grow an annual average of 3 percent.
The current account surplus, however, is expected to decline sharply from $42.7 billion last year to $11.4 billion this year as imports will grow faster than exports amid rebounding domestic demand and a hike in oil and commodity prices, according to the report.
The KDI's latest growth outlook augmented optimism that South Korea is continuing to make a faster-than-expected comeback from what many see as the worst downturn in more than a decade, thanks to the government's aggressive fiscal spending and eased monetary policy by the nation's central bank.
The government is saying that it will maintain the expansionary macroeconomic policy for the time being until sustained growth is assured. The Bank of Korea last week kept its key interest rate at a record low of 2 percent for 15th straight month.
A debate has been mounting over when and how to roll back such economy-boosting measures in order to minimize the side effects they could bring on the economy if left in place for a protracted period of time.
The KDI said that it is necessary to "normalize" expansionary fiscal policies by withdrawing diverse spending measures temporarily introduced to tide over the global crisis, and to streamline the overall expenditure process.
On the monetary policy front, the think tank added it is also necessary to normalize the current low-interest rate stance considering that a delayed action could result in a hike in prices.
"With anxiety growing over possible side effects from the current low interest rate stance despite a robust economic recovery, there is the need to keep tabs on price destabilization," the KDI said.
"Against this backdrop, we need to push for normalization of the low interest rate stance and preemptively deal with such a price-hike possibility," it added.
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