In its earlier forecast released in November, KIET had expected Asia's fourth largest economy to pull off 2.5 percent growth this year.

KIET also predicted that exports, the country's key economic driver, will rise 11.1 percent this year on the back greater world trade, logging the first double-digit growth in six years. The country's imports is forecast to jump a sharp 15.2 percent on-year in 2017, with trade surplus falling to $82.7 billion from $89.4 the previous year.

Private consumption is expected to gain 2.2 percent as economic recovery and stimulus measures being pursued by the new Moon Jae-in government will likely boost consumer sentiment. But stagnant household income and rising borrowing costs may offset such positive changes, the KIET report said.

Facility investment will rise some 7.3 percent in 2017, a sharp turnaround from a 2.3 percent drop a year earlier on the back of brisk overseas sales of locally made products, while construction investment will slow down to 5 percent from last year's 10.7 percent amid a cool-down in a real estate boom.

The think tank said South Korea's key export items, such as semiconductors and steel, will bask in booming global demand and rising prices, but spreading trade protectionism is expected to put more pressure on the country's exporters. (Yonhap)