The think tank warns U.S.-Iran war is lifting oil prices and inflation, citing weaker business and consumer sentiment and export uncertainty
CI of Korea Development Institute (KDI).
Dark clouds are gathering over the South Korean economy. Not only foreign investment banks (IBs) but also South Korea’s own national research institutes have begun to mention downside risks to the economy. The possibility of worsening export conditions, in addition to the inflation rate, is also growing due to the U.S.-Iran war.
In its ‘Monthly Economic Trends’ report for April, published on April 7, the Korea Development Institute (KDI) assessed the recent state of our economy, stating, “While the economy has shown a trend of moderate recovery, downside risks are expanding due to the U.S.-Iran war.” This marks the first time in a year that KDI has used the expression ‘downside risks to the economy’ since last April, when U.S. President Donald Trump imposed mutual tariffs.
Until the U.S.-Iran war, South Korea’s economic performance had been strong. In February, all-industry production rose by only 0.5% year-on-year due to a three-day reduction in working days for the Lunar New Year holiday, but the average for January and February showed a 2.6% increase. Notably, semiconductor production during this period surged by 10.1%, a significant expansion from the 1.6% increase in December of last year. The average facility investment for January and February also increased by 9.3%, driven by strong semiconductor investment, and retail sales recorded a 2.7% rise, higher than the 1.2% seen in December of last year.
However, the situation has changed rapidly of late. In March, the Business Survey Index (BSI) for the manufacturing sector’s business outlook fell to 71, down 6 points from the previous month’s 77. The BSI for the non-manufacturing sector’s outlook also dropped by 4 points over the same period, from 74 to 70. A lower BSI indicates that business conditions are worsening. The Consumer Sentiment Index in March also saw a relatively sharp decline, recording 107.0 compared to 112.1 in the previous month. KDI diagnosed, “With global oil prices surging due to the Middle East war, business sentiment has also deteriorated,” adding, “The rise in oil prices could spill over into inflation, potentially acting as a negative factor for future consumption.”
In trade, uncertainty has also grown. While exports last month surged by 48.3% year-on-year, driven by strong demand related to artificial intelligence (AI), the possibility of shrinking external demand is increasing in the aftermath of the U.S.-Iran war. In particular, disruptions in raw material supply are becoming apparent, with crude oil imports plummeting by 52.4% year-on-year during the period of the 21st to the 31st of last month.
Inflationary pressure is mounting. In March, consumer prices already recorded a 2.2% increase, up from 2.0% the previous month, due to a surge in petroleum product prices. Furthermore, the potential for future price increases is also rising, as the breakeven inflation rate from the bond market (based on 10-year Korea Treasury Bonds) reached 2.7% last month, up 0.2 percentage points from the previous month’s 2.5%. KDI stated, “As the rise in oil prices and disruptions in raw material supply are gradually reflected, price pressures are likely to intensify, particularly for related items such as airfares.”
Financial markets are also experiencing significant volatility. As of the end of March, the 3-year Korea Treasury Bond yield stood at 3.55%, higher than the 3.04% at the end of the previous month, due to concerns about inflation driven by soaring oil prices. In March, the net selling amount by foreign investors on the KOSPI reached 35.7 trillion won.
KDI stated, “With a significant rise in petroleum product prices, there is a possibility that inflationary trends will expand, centered on sectors closely linked to crude oil.” The institute added, “Amid somewhat worsened export conditions due to global economic instability, the recovery in investment could also be constrained by heightened uncertainty.”
Jung Suk-yee
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