Stagnant exports are weighing down on South Korea's economic recovery, which is showing signs of a modest gain on the back of increased domestic demand, a state-run think tank said Thursday.

In its latest report on the economy, the Korea Development Institute said a continuing slump in outbound shipments is hurting industrial output and holding up the recovery process.

Industrial production grew just 1.8 percent on-year in March, despite a 3.1-percent rise in service sector output, the KDI said.

South Korea's exports fell 4.3 percent on-year in March mainly due to a tumble in prices of refined petroleum goods. In April, exports were down an alarming 8.1 percent compared to the year before.

"Last month's fall is troubling because it is related to the slowing down of the global economic recovery that can directly impact a trade nation like South Korea," the report said.

Sluggish export shipments have also caused manufacturing capacity utilization to fall, it said, adding such developments are not good for future employment or business investment. 

While first-quarter economic growth accelerated from the previous three-month period, the 0.8 percent on-quarter increase cannot be interpreted as an indicator of full recovery, it added.

On the positive side, the KDI said service production, which is related to domestic demand, is maintaining upward momentum with investment-related indicators showing signs of moderate recovery.

"March witnessed relatively high growth in financial and insurance activities and social services, suggesting a moderation in domestic demand contraction," it said.

The KDI said that favorable conditions have been observed in private investment areas with improvements detected in machinery investment and money poured into the construction sector. (Yonhap)