South Korea's economy expanded 0.9 percent in the first quarter with exports making gains and domestic demand improving, data released by the Bank of Korea (BoK) Thursday showed.

The economy expanded 2.8 percent year-on-year, which is the slowest year-on-year growth rate in two-and-a-half years. Exports increased 3 percent from the previous quarter, while the implementation of several free trade deals, most recently with the US, is expected to boost the sector further. 

Meanwhile, the consumer confidence index rose to 104 in April, which is the highest since May 2011, indicating that the public is feeling slightly more upbeat about the economy.

The GDP report comes after the central bank lowered earlier in the month the country's growth forecast for 2012 to 3.5 percent on account of global economic slowdown. In its revised 2012 economic outlook, the BoK said it was lowering the 3.7 percent growth projection made in December.

According to the central bank, downward revisions of global economies and rising oil prices are overshadowing any sign of improvements in exports. The exports to Europe are expected to be seriously affected with the debt crisis continuing to loom over the Eurozone.

In addition to the export concern, the rising inflation has been a worry for the general public for some time. Earlier this month, the BoK decided to keep the key interest rate unchanged at 3.25 percent, subsequent to the inflationary pressures seen in the country.

Much of the increase in food prices relates to higher global commodity prices. South Korea was hit by bad weather and foot-and-mouth outbreaks in recent years.