South Korea Hit Hard by Middle East Conflict... OECD Slashes Growth Outlook to 1.7%

Growth Forecast for Next Year Maintained at 2.1%
Second Largest Downward Revision Among G20 After the UK
"Prolonged Conflict Would Burden Production Activities"

Yonhap News

The Organisation for Economic Co-operation and Development (OECD) has revised its forecast for South Korea's economic growth rate for this year, lowering it by 0.4 percentage points compared to three months ago. This is the second largest downward adjustment among the G20 countries. The OECD suggested that South Korea, which has a high proportion of energy imports, could see its production activities contract due to the ongoing war in the Middle East. However, the growth outlook for next year remains unchanged.

In its "Interim Economic Outlook" released on March 26, the OECD projected South Korea's economic growth rate for this year at 1.7 percent. This is 0.4 percentage points lower than the 2.1 percent forecast announced in December last year.

The OECD explained, "In the case of some Asian countries with high dependence on Middle Eastern energy imports, including South Korea, prolonged conflict could lead to energy shortages and put a burden on production activities."

The downward revision in South Korea's growth forecast was the second largest among G20 countries, following the United Kingdom (-0.5 percentage points). The eurozone (the 20 countries that use the euro) also saw a 0.4 percentage point decrease, while Germany, France, and Italy each had their forecasts lowered by 0.2 percentage points.

This is seen as a reflection of several negative factors, including supply chain instability caused by the Middle East crisis, rising energy prices, and increased volatility in the won-dollar exchange rate.

The OECD predicted that most countries would be commonly affected in terms of growth and inflation, but anticipated that South Korea, with its high dependence on Middle Eastern energy, would be hit particularly hard. South Korea relies on the Middle East for about 70 percent of its crude oil and 20 percent of its liquefied natural gas (LNG).

If the OECD's outlook holds, it will be difficult for the government to achieve its goal of raising South Korea's economic growth rate to 2.0 percent this year, which would surpass the potential growth rate of 1.8 percent.

Nevertheless, the growth forecast for next year remained unchanged at 2.1 percent.

The Ministry of Economy and Finance assessed that the OECD expects South Korea's economy to recover at a relatively faster pace than the global economy.

While the OECD projects the global economic growth rate to rise by only 0.1 percentage points to 3.0 percent next year, it forecasts that South Korea's growth rate will rebound by 0.4 percentage points.

As for this year's inflation rate, the OECD now expects it to reach 2.7 percent, which is 0.9 percentage points higher than its previous projection. The inflation rate for next year is forecast to remain at 2.0 percent.

The OECD also analyzed that, depending on the development of the war in the Middle East and fluctuations in energy prices such as oil, there are both upward and downward risks for South Korea's gross domestic product (GDP) and supply chains.

The OECD recommended, "To respond appropriately to the current crisis, government policy needs to be timely, targeted at households and companies most in need, and provide incentives for energy savings."

To this end, the OECD suggested measures such as setting an end point for fiscal support and ensuring sustainability, diversifying supply sources, introducing financial stability frameworks, and promoting green energy.

Meanwhile, the OECD kept its global growth forecast for this year unchanged at 2.9 percent compared to three months ago. The forecast for next year was lowered by 0.1 percentage points to 3.0 percent. The OECD explained, "When reviewing data up to February this year, there was a possibility for global growth to rise by 0.3 percentage points, but this was completely offset as the Middle East conflict intensified."

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