If Oil Prices Rise 10%, GDP Drops by 0.2%P, Current Account Deficit Falls by $2 Billion, and Inflation Rises by 0.1%P

Economic Ripple Effects in Korea Due to the Rise in International Oil Prices

[Asia Economy Sejong=Reporter Kim Hyewon] An analysis has emerged that the rise in international oil prices will have negative ripple effects on the overall macroeconomy, worsening South Korea's economic growth rate and current account balance while driving up consumer prices.

According to the National Assembly Budget Office on the 16th, economic model analysis results show that a 10% increase in international oil prices leads to a 0.2 percentage point decrease in Gross Domestic Product (GDP), a $2 billion reduction in the current account balance, and a 0.1 percentage point rise in consumer prices.

First, the rise in international oil prices increases import prices, which simultaneously raises domestic producer prices and consumer prices.

Additionally, the increase in international raw material prices, including crude oil, drives up both import and export prices; however, since the rise in import prices is relatively larger, trade terms deteriorate and the current account balance is likely to incur a deficit.

Such inflation and worsening trade terms cause higher production costs for companies and weaken households' real purchasing power, shrinking domestic demand such as consumption and investment, ultimately impacting GDP decline.

The Macroeconomic Analysis Division of the National Assembly Budget Office stated, "If the rise in international raw material prices, including crude oil, due to economic sanctions against Russia does not remain a short-term phenomenon, it will pose a relatively significant burden on the domestic economy."

They added, "As inflation accelerates monetary tightening in major countries worldwide, if the rapid surge in oil prices causes the global economy to slow down quickly, downward pressure on the domestic economic growth rate will increase further."

The U.S. Department of Commerce applies the Foreign Direct Product Rule (FDPR) to 57 sub-technology items across 7 sectors on the Export Control List (CCL) targeting Russia, which invaded Ukraine. Although the U.S. has included South Korea as an FDPR exemption country for Russia, semiconductors are on the export control list, and the possibility of expanding export restrictions in the future cannot be ruled out.

The National Assembly Budget Office pointed out, "South Korean companies operating in Russia, mainly large corporations, are concentrated in manufacturing sectors such as automobiles, electronics, and food products, with the primary purpose of expanding the local market," adding, "Local companies are exposed to risks such as factory shutdowns, ruble depreciation, and payment settlement risks."

South Korea's trade volume with Russia was $27.34 billion last year, accounting for 2.2% of total trade volume, making Russia one of the top 10 trading partners. Last year, exports to Russia amounted to $9.98 billion, representing 1.5% of total exports, while imports from Russia were $17.36 billion, accounting for 2.8% of total imports.

This content was produced with the assistance of AI translation services.