Bank of Korea: "Middle East Impact to Intensify in Q2... Annual Growth Rate to Fall Below 2%"

April Economic Assessment
Robust AI Demand and Supplementary Budgets Help Cushion Shock

The Bank of Korea has projected that the domestic economic shock stemming from the Middle East war will become pronounced in the second quarter of this year, potentially dragging the annual growth rate below 2.0%. Even if the situation in the Middle East stabilizes and the recovery resumes in the second half of the year, the pace of recovery is expected to be gradual.

In its “April Economic Assessment” released on April 10, the Bank of Korea made this forecast and indicated that it may revise its annual growth projection downward in the May economic outlook. The central bank had previously projected in February that South Korea’s economic growth rate for this year would be 2.0%.

Until the first quarter of this year, the Bank of Korea expected the quarter-on-quarter growth rate to exceed the original forecast of 0.9%. The central bank explained, “Exports saw a significant increase thanks to rising semiconductor demand, and consumer recovery continued on the back of improved income and asset (stock) conditions and positive sentiment.” Governor Rhee Chang-yong also stated at a press conference following the base rate decision that “robust export growth and a recovery in consumption led to a stronger-than-expected expansion in growth through the first quarter.”

However, the Bank of Korea noted that, despite resilient AI investment demand and government policy responses such as supplementary budgets partially buffering the shock, the surge in energy prices originating from the Middle East could exert downward pressure in the second quarter. In terms of quarterly growth trends, the economic shock from the Middle East war is expected to have its most direct impact on second-quarter growth. The Bank of Korea stated, “In the second half of the year, as the Middle East situation gradually stabilizes, the recovery will resume,” but also projected, “Given the delays in normalizing energy supply chains, the pace of recovery may be slow.” As a result, the annual growth rate is now expected to fall short of the original projection of 2.0%.

The consumer price inflation rate is expected to significantly exceed the previous projection of 2.2%. The central bank assessed, “There is greater upward pressure due to rising international oil prices caused by the Middle East situation.” Governor Rhee also stated that “the inflation rate could climb to the mid-to-high 2% range going forward.” However, the Bank of Korea added, “There is considerable uncertainty regarding the trajectory of oil prices and the extent to which oil shocks will be transmitted,” and explained that “the government’s price stabilization measures and the recent stabilization of agricultural product prices could partially offset the increase.”

The current account surplus for this year is expected to exceed the February projection of $170 billion. The Bank of Korea explained, “Although energy import costs will rise significantly, the surplus is expected to be larger than previously forecast due to a sharp increase in semiconductor exports driven by higher memory prices.”

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