Government Maintains Economic Recovery Assessment for Five Months, Warns of "Rising Inflation and Downside Risks Due to Middle East Impact"

The government has assessed that the economic recovery trend in Korea has continued for five consecutive months, supported by robust semiconductor-led exports and signs of improvement in domestic demand. However, for the first time, it directly mentioned the possibility of geopolitical risks such as rising international oil prices due to the Middle East conflict spreading to the real economy, issuing a warning about increasing inflation and downside risks to the economy.

The government has assessed that the economic recovery trend has continued for five months, supported by strong semiconductor exports. The photo shows containers stacked full at the Sinsiendae Pier in Busan Port. Photo by Yonhap News.

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On March 20, the Ministry of Economy and Finance released the March edition of its report “Recent Economic Trends (Green Book),” stating in its overall assessment, “Recently, our economy has shown a continued recovery trend, driven by improvements in domestic demand such as consumption and strong exports centered on semiconductors.” The government has maintained this assessment of a “recovery trend” for five straight months since it upgraded its economic outlook in November last year.

However, unlike last month, this time the Middle East risk was mentioned for the first time. The Ministry of Economy and Finance stated, “With the expansion of geopolitical risks, such as rising international oil prices due to the situation in the Middle East, there are concerns over increased inflation, greater burdens on people’s livelihoods, and heightened downside risks to the economy.” The ministry further diagnosed, “With the worsening of the trade environment caused by the Middle East situation and tariff impositions by major economies, volatility in the international financial markets and energy prices may increase, raising concerns about a slowdown in trade and growth.” It also added that uncertainties remain, including employment difficulties in vulnerable sectors, the pace of recovery in construction investment, and the impact of U.S. tariff measures.

This is the first time in eight months that the term “downside risk to the economy” has appeared in the Green Book. An official from the Ministry of Economy and Finance commented, “After the 12·3 Martial Law Incident, the term ‘downside risk to the economy’ was included, and related expressions were continuously used up to the July edition last year. Since then, this is the first time the term has reappeared.”

In response, the government has decided to swiftly draw up a supplementary budget to stabilize livelihoods and support economic recovery in order to minimize the impact of the Middle East situation. In addition, a joint emergency response team of relevant agencies will monitor major indicators around the clock and respond quickly if any abnormal signs are detected.

Looking at real economic indicators, the production sector showed a mixed performance across industries. According to the Industrial Activity Trends for January, total industrial production fell by 1.3% compared to the previous month, as output in the mining and manufacturing sector decreased by 1.9% and construction industry output decreased by 11.3%, while the service sector remained flat. However, exports in February surged by 28.7% year-on-year, driven by strong performance in semiconductors, computers, and ships, continuing to serve as a key driver of economic recovery.

On the expenditure side, facility investment in January increased by 6.8% from the previous month, and retail sales also rose by 2.3%, indicating simultaneous improvements in consumption and investment. The Consumer Sentiment Index (CSI), which reflects consumer confidence, recorded 112.1 in February, up 1.3 points from the previous month, sending out a positive signal. The Corporate Business Survey Index (CBSI) result for February was 94.2, a 0.2-point increase from the previous month, and the outlook for March is 97.6, a 6.6-point increase. In terms of economic indicators, the coincident index for January was unchanged from the previous month, while the leading index rose by 0.7 points.

The labor market saw an expansion in quantitative growth. In February, the number of employed persons increased by 234,000 year-on-year, widening the gap compared to January’s increase of 108,000. The employment rate (for those aged 15 and over) stood at 61.8%, up 0.1 percentage point from the same month last year. However, the unemployment rate also rose by 0.2 percentage point to 3.4% year-on-year, which is attributed to sluggish performance in manufacturing and construction sectors.

The inflation rate remained stable at 2.0% in February, following the same figure in January. However, if oil price increases due to the Middle East situation are fully reflected in the future, upward pressure on inflation is expected to intensify. The OECD’s core inflation indicator, which excludes food and energy, rose by 2.3%, while Korea’s core inflation index, which excludes agricultural and petroleum products, increased by 2.5%.

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