Nov. 22 (Bloomberg) -- South Korea’s economy will expand this year, a state research institute said after previously forecasting a decline, as an improved global economic outlook helps the nation’s exports.

Gross domestic product will expand 0.2 percent this year before rising 5.5 percent in 2010, the Korea Development Institute said in a report released today. That compares with a September forecast of a contraction of 0.7 percent this year and a 4.2 percent expansion in 2010.

“The improvement in exports is sustained while consumption and corporate investment are rising,” the institute said. “The recovery pace is forecast to be sustained for some time and the future economic policy will need to be normalized gradually from the policy trend taken during the economic crisis.”

Asia’s fourth-largest economy expanded 2.9 percent in the third quarter from the second, the fastest pace in seven years, as companies including Samsung Electronics Co. and Hyundai Motor Co. reported rising profits.

Central bank Governor Lee Seong Tae on Nov. 12 kept the benchmark rate at a record-low 2 percent for a ninth month as he seeks to strengthen the recovery. Economists expect South Korea will be one of the first nations in Asia to boost borrowing costs as unemployment declines and business confidence gains.

Inflation Goal

South Korea’s goal of keeping inflation between 2.5 percent and 3.5 percent will probably require the central bank to raise its benchmark interest rate as exports spur a rebound, the Organization for Economic Cooperation and Development said on Nov. 20. The central bank’s policy board next meets on Dec. 10.

South Korea’s government allocated extra funds and frontloaded spending to try to boost the economy. The Bank of Korea cut interest rates by 3.25 percentage points between October and February, the most aggressive easing since the bank began setting a policy rate a decade ago.

South Korea will post a current account surplus of $41.5 billion this year and $16.2 billion next year, the state-run institute said today. Exports will fall 13.8 percent this year and rise 13.7 percent in 2010, it said. Consumer price inflation will average 2.8 percent this year, according to the report.

To contact the reporter on this story: Seyoon Kim in Seoul at skim7@bloomberg.net

Last Updated: November 21, 2009 22:01 EST