As U.S.-Israeli airstrikes on Iran spread into a Middle East war, "red lights" have turned on for the three indicators that steer Korea's economic growth: the exchange rate, oil prices, and inflation. The won-dollar rate at one point on the 4th topped 1,500 won, a level seen during the global financial crisis, and international oil prices rose more than $10 above the government's expected average. Higher exchange rates and oil prices feed into consumer prices with a lag. This has raised concern that achieving the government's target of 2% economic growth this year could become difficult.
◇ Exchange rate tops 1,500 won; international oil prices jump more than 10%
The won-dollar rate broke through 1,500 won during early morning trading on the 4th. It was the first time since March 2009, during the global financial crisis, that the intraday price exceeded 1,500 won. Weekly trading that day also opened at 1,479 won, up 12.9 won from the previous day. As geopolitical uncertainty around the Middle East grew, preference for the U.S. dollar strengthened and the won weakened.
With the Strait of Hormuz, through which 20% of the world's crude is shipped, fully closed, international oil prices also rose. Over two days on Feb. 2–3 (local time), West Texas Intermediate (WTI) and Brent futures, and Dubai spot crude all climbed more than 10%. WTI and Dubai crude were in the $70 range, and Brent was in the $80 range. The government and the Bank of Korea had expected this year's average international oil price to be in the $60 range. Some say prices could reach $100 if the Middle East crisis drags on.
Rises in the exchange rate and international oil prices are likely to lead to higher inflation. According to the Bank of Korea, import prices rose month over month for seven straight months from July last year to January this year. That was the first time in seven years and six months since 2018 (January to July). While the exchange rate and oil prices did not jump sharply, higher precious metal prices drove the increase. Now, the Middle East crisis could push import prices up further. In that case, consumer prices will reflect it with a lag. Earlier, January consumer prices rose 2% on-year, the lowest increase in five months.
◇ If high inflation makes people snap their wallets shut, "2% growth" is in jeopardy
Rising prices erode people's real purchasing power, making a domestic demand recovery harder. According to the Ministry of Data and Statistics (MODS), real consumer spending excluding last year's price increase fell 0.4% from a year earlier. It turned negative for the first time in five years since 2020. With real income not rising much and prices climbing, people appear to have snapped their wallets shut. The real income growth rate dropped from the 2% range in the first quarter last year to the 0% range in the second quarter, and stayed in the 1% range in the third and fourth quarters.
Warning lights also turned on for the government's goal of "2% economic growth this year." In its "2026 economic growth strategy" released in Jan., the government raised this year's growth outlook to 2.0% from 1.8%. It also said private consumption, along with exports, would shoulder one pillar of growth. At the time, the government said, "Private consumption will expand on improved real purchasing power and a recovery in consumer sentiment."
The Hyundai Research Institute said, "If the United States and Israel and Iran fight for more than a month and then resume negotiations, this year's international oil price will hover around $80, the consumer price inflation rate will rise by 0.4 percentage point, and the economic growth rate will fall by 0.1 percentage point." It further projected that if the Middle East crisis persists, oil prices will top $100, the consumer price inflation rate will increase by 1.1 percentage points, and the economic growth rate will drop by 0.3 percentage point.