War between the United States, Israel, and Iran is escalating. Iranian Supreme Leader Khamenei and other top officials have been assassinated, followed by airstrikes on key facilities. Iran and its proxies have responded by blockading the Strait of Hormuz and attacking U.S. military bases in the Middle East. U.S. President Donald Trump has indicated the military operation is expected to conclude in four to six weeks, though he acknowledged it could extend depending on circumstances.
It is premature to predict how the war will unfold. The key variable is international oil prices, requiring scenario-based analysis depending on the conflict's trajectory and duration of the Hormuz blockade. Referencing the Hyundai Research Institute's analytical methodology, scenarios can be classified as: optimistic (oil below $70), baseline (around $80), pessimistic ($85-100), and extreme (above $100).
Given Trump's four-to-six-week timeline and political concerns over rising oil prices, the baseline scenario appears most realistic. This assumes oil prices rise modestly to average around $80 annually, with no prolonged Hormuz blockade. South Korea's growth rate would face downward pressure of 0.15 to 0.2 percentage points, while inflation would see upward pressure of 0.4 percentage points. The Federal Reserve may consider resuming rate cuts around year-end given limited inflation impact, though smaller cuts than previously expected appear inevitable. The Bank of Korea may also face growing concerns about a potential hawkish pivot while maintaining its rate-hold stance this year.
The impact on growth and inflation is expected to be greater for South Korea than the United States. Korea ranks among the highest OECD members in per-capita oil consumption and economic dependence on crude, with significant reliance on Middle Eastern energy imports. Should conditions deteriorate beyond the pessimistic scenario, pressure for central bank tightening and currency depreciation would intensify. Under the extreme scenario, Korea's growth rate would decline by more than 0.4 percentage points while inflation rises over 0.8 percentage points. A worst-case scenario could see the central bank raising policy rates, long-term government bond yields exceeding 4%, and the won-dollar exchange rate fluctuating above 1,500 won for an extended period.
The war's ultimate impact hinges on its duration and spillover effects. During the 2022 Russia-Ukraine war, inflation pressures were already elevated due to fiscal expansion and ultra-low rates amid excess liquidity. Pent-up demand-side inflation from the pandemic combined with war-induced supply-side inflation.
Current conditions differ markedly. Major economies are operating policy rates near neutral levels, and inflation is gradually stabilizing. Unlike the broad-based price increases during the Russia-Ukraine conflict, this shock is likely to remain concentrated in energy prices. Economic forecasts are unlikely to deteriorate significantly, and central banks are unlikely to pursue excessive tightening, suggesting risks are more contained than before.
