War Prolongation Could Push Korea's Growth to Sub-1%

As the Iran war shows signs of escalation, projections warn that prolonged conflict could push South Korea's economic growth rate down to the 0% range.

NH Financial Research Institute presented a pessimistic scenario on the 17th, suggesting that if the Iran war continues for more than a year, inflation could rise by an additional 2-4 percentage points while consumption and investment contract, potentially sending this year's growth rate plunging to less than half of the government and Bank of Korea's forecast of 2%.

The previous day, the Korea Institute for Industrial Economics and Trade also warned of economic shocks from a prolonged Middle East crisis. The institute cautioned that if high oil prices around $100 per barrel persist and damage the manufacturing sector, stagflation—economic stagnation amid rising prices—could become reality. Prolonged supply chain instability from the blockade of the Strait of Hormuz could also indirectly impact the semiconductor industry that underpins Korea's economy.

Contrary to U.S. President Donald Trump's confident assertion that the conflict would end within 4-5 weeks, the Iran war now stands at a crossroads of prolonged attrition. Israel has launched ground operations in Lebanon, and President Trump has postponed his China visit scheduled for late March. Amid growing concerns of a protracted war, international oil prices are fluctuating around $100 per barrel, and the won-dollar exchange rate has breached 1,500 won. Interest rates are also showing volatility. The government's sense of crisis is intensifying as well.

President Lee Jae-myung instructed at a Cabinet meeting, "We must prepare countermeasures with the worst-case scenario in mind, assuming the situation will be prolonged," adding, "Please swiftly organize a war supplementary budget." President Lee particularly emphasized direct support through local currency via the supplementary budget, stating, "It seems we have no choice but to implement income support policies."

There is no disagreement that this is an economic emergency. Korea's economy faces a complex crisis where energy instability and global supply chain disruptions are spreading to the real economy while financial market volatility increases. Under these circumstances, organizing a supplementary budget to support vulnerable groups directly hit by soaring fuel prices is unavoidable.

The problem is that no one knows how long the crisis will last. If fiscal ammunition is exhausted immediately through a large-scale supplementary budget, preparations for a prolonged war in the second half of the year become impossible. Issuing deficit bonds would not only worsen fiscal conditions but also raise interest rates, negatively affecting consumption and investment.

To prepare for a prolonged war, the supplementary budget must be limited to the minimum scale for essential targets only. Now is the time to keep all possibilities open and build solid defensive walls across the real economy, financial markets, and fiscal policy.