Korea Development Institute (KDI), a state-run think tank, warned that downside risks to the Korean economy are expanding due to surging oil prices and global supply chain disruptions stemming from the Middle East war, even as the economy maintains a moderate recovery.
In its April economic trends report released on the 7th, KDI said, "While domestic demand continues to improve moderately and exports posted strong growth led by semiconductors, downside risks have expanded since March due to surging international oil prices and supply chain instability caused by the Middle East war."
KDI raised its warning level from mentioning the "possibility of downside risks" in the previous March edition to "expanding risks" just one month later.
All-industry production growth in February narrowed from 4.7 percent to 0.5 percent due to fewer working days caused by the Lunar New Year holiday shift. However, KDI noted that the January-February average recorded 2.6 percent growth, slightly above the prior month's 2.1 percent after adjusting for holiday effects, indicating a moderate improvement trend remained intact.
Semiconductor production in particular broke out of the adjustment phase that had persisted since October last year, posting a robust 27.1 percent increase in February and driving the expansion in mining and manufacturing output.
Improvement continued on the consumption side as well. Retail sales for January-February grew 2.7 percent after removing Lunar New Year effects, higher than December's 1.2 percent. Service sector output also rose 3.3 percent, maintaining a solid trend.
Facilities investment averaged 9.3 percent growth in January-February, led by strong machinery investment centered on semiconductor manufacturing equipment, which surged 40.0 percent. Construction investment contraction during the same period also narrowed sharply to minus 3.0 percent from minus 15.1 percent in the previous quarter.
However, as the Middle East war intensified, consumer prices in March rose 2.2 percent, up from 2.0 percent the previous month. Petroleum product prices sharply rebounded from minus 2.4 percent to 9.9 percent due to surging oil prices, pushing up overall inflation.
KDI warned of further price increases, stating, "As oil price hikes and raw material supply disruptions are gradually reflected, upward pressure on prices may intensify, particularly for related items such as airfares." The 10-year government bond-based breakeven inflation rate also climbed from 2.5 percent in January and February to 2.7 percent in March, reflecting growing inflation concerns in the market.
March exports recorded a robust 48.3 percent increase on a daily average basis, driven by strong AI-related ICT items including semiconductors (140.5 percent) and computers (176.6 percent). Exports to major markets including China (57.0 percent) and the United States (40.7 percent) also maintained solid momentum on the back of semiconductor demand.
However, exports to the Middle East plunged 51.3 percent due to logistics disruptions caused by the war. Crude oil imports rose 27.8 percent during March 1–20, but then swung to a 52.4 percent decline during March 21–31 as logistics disruptions intensified.
KDI projected that export conditions may deteriorate somewhat due to weakening external demand from the Middle East war. Rising construction material costs could also constrain the domestic construction investment recovery, raising concerns that the Middle East-driven shock could spread beyond exports to domestic investment more broadly.
As downside risks mounted, sentiment indicators turned lower across the board. The Business Survey Index outlook fell from 77 to 71 for manufacturing and from 74 to 70 for non-manufacturing.
The Composite Consumer Sentiment Index (CCSI) dropped relatively sharply from 112.1 to 107.0. While it remains above the baseline of 100, KDI assessed that if oil price increases feed through to consumer prices and erode households' real purchasing power, the consumption recovery itself could be constrained.