The South Korean economy is facing heightened uncertainty as the recovery of domestic demand is likely to slow amid a recent spike in COVID-19 cases, a state-run think tank said Sunday.

Asia's fourth-largest economy is on a recovery track amid solid exports, but the toughest-ever virus curbs, in effect due to the fourth wave of the pandemic, may dampen improving domestic demand, according to a monthly economic assessment report by the Korea Development Institute (KDI).

"The intensifying spread of COVID-19 may partially limit the recovery of domestic demand, mainly in the face-to-face service industry," the English-language report showed.

South Korea is grappling with another wave of the pandemic as its daily new cases topped 1,000 for more than a month.

Since July 12, the country has enforced Level 4 distancing rules, the highest in its four-tier scheme, in the greater Seoul area in a bid to stem a spike in COVID-19 cases. Most non-other capital areas are placed under the second-highest virus curbs.

The toughest restrictions ban gatherings of more than two people after 6 p.m. and place a 10 p.m. curfew on restaurants and cafes, and a ban on nightclubs and other entertainment venues.

Exports, which account for half of the economy, rose 29.6 percent on-year to a record high of US$55.4 billion in July. It marked the ninth straight month of gains.

Retail sales rebounded in June after suffering the biggest fall in 10 months in May.

But the country's consumer sentiment dropped in July over the recent flare-up in COVID-19 infections, marking the first decline since December last year, central bank data showed.

Finance Minister Hong Nam-ki earlier said the government could attain the economic growth target of 4.2 percent this year despite the resurgence in coronavirus cases.

The Bank of Korea forecast economic growth of 4 percent for this year. (Yonhap)