As tensions between the United States and Iran over the Middle East flared again, Brent crude on the 23rd (local time) topped $100 per barrel for the first time in about two months. If international oil prices do not fall below $100 by year-end, this year's growth rate could be limited to 2.1%, according to the Bank of Korea's analysis. The Bank of Korea (BOK) also projected that inflation could rise to 3%.
◇ Brent crude up 20% in five days... Bank of Korea (BOK) says "growth may be in the low 2% range this year"
The government had expected that strong semiconductor exports this year would make 3% growth achievable. But the recent rapid shift in the Middle East has introduced a new variable. Because Korea is highly dependent on crude oil imports, a rise in international oil prices can push up import prices and have a negative spillover effect on growth.
Brent crude, the benchmark for international oil prices, rose 20% over the past five days as U.S.-Iran tensions intensified again. Earlier, the Bank of Korea (BOK) in May projected 2.6% growth for this year on the expectation that international oil prices would be lower than this. At the time, the Bank of Korea (BOK) said, "This assumes Brent crude rises to an average of $103 in the second quarter and then falls to the mid-$90s in the second half."
Accordingly, some are saying the growth outlook for this year should be revised. If international oil prices remain elevated, global energy supply and demand could deteriorate, expanding production disruptions mainly in sectors with high dependence on raw material imports.
In its May growth outlook, the Bank of Korea (BOK) also analyzed, "If a blockade of the Strait of Hormuz persists and international oil prices remain above $100 at year-end, this year's growth rate will fall to 2.1%, down 0.5 percentage points from the previous forecast." It also said, "If the Middle East stalemate becomes prolonged, this year's consumer price inflation could rise to 3%."
◇ Will the high inflation and export slump seen during the Russia-Ukraine war recur?
Korea also felt the impact of a surge in international oil prices during the Russia-Ukraine war in 2022. The import price inflation rate in 2022 was 25.9%, the highest since 2008 (36.2%) during the global financial crisis. The current account surplus that year fell sharply to $29.83 billion, about 65% of the previous year's $85.23 billion.
The growth rate in 2022 was 2.6%, as the government had projected. This was mainly due to a partial recovery in domestic demand and corporate investment that had been suppressed during COVID-19. Net exports (exports minus imports) contributed negative 0.1 percentage point to growth that year. Consumer price inflation was also 5.1%, the highest since 1998 (7.5%) during the foreign exchange crisis, adding to the public's burden.
In its currency and credit policy report released in March, the Bank of Korea (BOK) said, "While global inflation has eased since peaking in the second half of 2022, multiple risk factors remain on both the demand and supply sides." On the demand side, it noted that growth in major economies has been better than expected and that expansionary fiscal policies could affect inflation. On the supply side, it said that factors such as expanded investment in artificial intelligence (AI) and rising geopolitical risks including the Middle East war could push prices higher.