KDI: "Korean Economy Shows Recovery After Modest Improvement"... Downside Risks from Middle East War Remain

The Korea Development Institute (KDI) has assessed that the Korean economy is on a recovery track, supported by a boom in semiconductor exports and improved consumer spending. However, it warned that downside risks to the economy persist due to the ongoing war in the Middle East, now stretching over two months.

Yonhap News Agency

In its May issue of the "KDI Economic Outlook," released on May 12, KDI stated, "Recently, our economy has shown signs of recovery, with a significant increase in semiconductor exports and improvements in the service sector."

This represents a more positive assessment compared to the previous month's issue, where KDI had expressed concerns that "the Korean economy, which had shown a gradual improvement, is now facing heightened downside risks due to the war in the Middle East."

KDI explained, "Amid the strong performance of semiconductors, export prices have surged, and export volumes have also registered relatively high growth. Although construction investment remains somewhat sluggish, robust growth in facility investment continues, and the upward trend in consumer spending is being sustained."

The export surge centered on semiconductors had a major impact. In April, exports rose by 48.0% compared to the same month last year. High growth rates were seen in ICT items such as semiconductors (173.5%) and computers (515.8%).

KDI also diagnosed that domestic demand continues to improve. In March, total industrial production increased by 3.5%, building on the previous month's 0.1% growth, driven by gains in both the service and manufacturing sectors. Production in the service sector grew by 5.1%, mainly led by the financial and insurance industries (12.7%), while manufacturing output increased by 3.6%, bolstered by strong performance in semiconductors (9.9%). The retail sales growth rate, a key indicator of consumption, was 5.0% in March, maintaining a solid trend following the previous month's 4.3% increase.

However, KDI pointed out, "Downside risks to the economy exist due to the ongoing war in the Middle East. Disruptions in crude oil transportation have led to increased production costs, which in turn have driven up consumer prices, while inflation expectations are also on the rise."

Indeed, in April, consumer prices rose by 2.6%, up from 2.2% the previous month, largely due to a 21.9% increase in petroleum product prices. KDI noted that while rising international crude oil prices have continued to exert upward pressure on inflation, government measures such as expanded fuel tax cuts have partially mitigated the increase in consumer prices.

The core inflation rate remained unchanged from the previous month at 2.2%, but inflation expectations have been rising steadily—from 2.6% in February, to 2.7% in March, and 2.9% in April. KDI assessed that, while the rise in petroleum product prices has not yet been clearly reflected in core inflation, it is gradually impacting inflation expectations.

Signs of caution related to the Middle East conflict were also detected in the Consumer Sentiment Index. In April, the index fell to 99.2, down from 107.0 the previous month, dipping below the benchmark level of 100.

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