Oil Prices to Rise Further in Second Half... Trade Deficit Expected to Reach $15.8 Billion This Year

Export slowdown due to major countries' tightening policies... 9.2% increase YoY
Imports rise 17%... Impact of raw material price surge and China lockdown measures
High oil prices continue in H2... Annual average expected at $106.9
Economic growth rate revised down to 2.6%... Domestic corporate facility investment contraction

On the 25th, as international oil prices surged sharply, domestic fuel prices for gasoline and diesel continued their high-rise trend, with fuel price information displayed at a gas station in Seoul. According to the Korea National Oil Corporation's oil price information system, Opinet, the average diesel price at gas stations nationwide recorded 2,000.93 KRW per liter the previous day. This is the first time diesel prices have exceeded 2,000 KRW since nationwide sales price statistics began being compiled in April 2008. Photo by Moon Honam munonam@

[Asia Economy Sejong=Reporter Lee Jun-hyung] An analysis has emerged that this year's trade deficit will reach $15.8 billion. International oil prices are expected to continue rising in the second half of the year due to geopolitical conflicts such as the Ukraine crisis. The Korea Institute for Industrial Economics & Trade (KIET) also revised down its economic growth forecast for this year.

On the 30th, KIET announced through the '2022 Second Half Economic and Industrial Outlook' that a trade deficit of $15.8 billion is expected this year. This is because exports have slowed due to decreased exports to Russia and tightening policies in major countries, while import values have sharply increased due to soaring raw material prices. Large-scale lockdown measures in China and rising maritime freight rates are also acting as negative factors for the trade balance.

Accordingly, KIET forecasted that exports and imports will increase by 9.2% and 17% respectively compared to the previous year. A KIET official explained, "Due to the expansion of global uncertainties such as the Ukraine crisis and China's lockdown measures, as well as supply chain instability, the export growth rate will significantly decrease compared to the previous year."

Export and import growth rates and trade balance trends. [Photo by Korea Institute for Industrial Economics and Trade]

Dubai Oil Price at $112.5 in Second Half

The high oil price situation is also expected to continue for the time being. According to KIET, international oil prices are expected to continue rising in the second half of this year, forming an annual average in the low $100 range. Decisions by the International Energy Agency (IEA) and the U.S. to release strategic reserves, as well as the United Arab Emirates (UAE)'s willingness to increase crude oil production, have only temporarily curbed the rise in international oil prices.

This is why KIET forecasted the average Dubai oil price in the second half of this year at $112.5 per barrel. This is $11.2 higher than the average price of $101.3 per barrel predicted for the first half of the year. KIET expects the average Dubai oil price this year to reach $106.9 per barrel, a 54.3% increase from last year. KIET stated, "Despite factors that could lower oil prices such as monetary tightening in major countries, oil demand is expected to rise in the second half of the year," adding, "International oil prices are expected to rise compared to the first half as geopolitical risks and structural supply shortages remain unresolved."

International oil price trends. [Photo by Korea Institute for Industrial Economics and Trade]

Annual Average Exchange Rate at 1,246.5 KRW

The won-dollar exchange rate is also likely to continue its upward trend. KIET forecasted that the average exchange rate in the second half of this year will be 1,255.3 KRW, up 17.6 KRW from 1,237.7 KRW in the first half. The annual average exchange rate for this year is expected to be 1,246.5 KRW. Earlier, the won-dollar exchange rate surpassed 1,200 KRW immediately after the Ukraine crisis in February and reached a yearly high of 1,286.4 KRW in mid-month.

The continuation of the high exchange rate trend in the second half is due to the global strength of the U.S. dollar. The scale and timing of U.S. monetary tightening remain uncertain, and geopolitical risks from the Ukraine crisis are prolonged, increasing exchange rate volatility. KIET said, "With continuous interest rate hikes expected by the U.S. Federal Reserve (Fed), the dollar's strength will persist unless geopolitical tensions in Eastern Europe are resolved," adding, "However, the Bank of Korea's gradual interest rate hikes may act as a factor strengthening the won, potentially limiting further exchange rate increases."

Trends of KRW-USD and Dollar Index. [Photo by Korea Institute for Industrial Economics and Trade]

Growth Rate at 2.6% This Year

KIET also lowered its economic growth forecast for this year from 2.9% to 2.6%, a 0.3 percentage point decrease. This is based on the judgment that the trade deficit will reach $15.8 billion and that worsening domestic and external conditions will reduce domestic companies' facility investments. Although social distancing and other quarantine guidelines have been eased, rising prices and interest rates are expected to somewhat dampen consumer sentiment.

KIET stated, "With the improvement of the COVID-19 situation, consumption-driven growth in the domestic economy remains valid this year," but added, "However, uncertainties such as the prolonged Ukraine crisis, intensified inflationary pressures, and supply chain disruptions persist." Furthermore, "Domestically, variables such as the direction and intensity of monetary policy shifts, household debt burdens, and expectations and support measures following the new government’s inauguration will play a role," it added.

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