The Organization for Economic Cooperation and Development (OECD) has issued a pessimistic outlook warning that the shockwaves from the Iran war will significantly impact South Korea's economy this year. In its interim economic outlook released on the 26th, the OECD revised Korea's growth forecast for this year downward from 2.1% to 1.7%. The organization had presented Korea's growth rate at 2.1% — the highest among major domestic and international institutions — at the end of last year, but slashed it by 0.4 percentage points in just three months. Among the Group of 20 (G20) nations, this marks the second-largest downward revision after the United Kingdom (0.5 percentage points). This stands in stark contrast to Japan, whose forecast was left unchanged, and the United States, whose forecast was actually revised upward.
Korea's forecast was notably lowered largely due to the country's heavy dependence on the Middle East for energy. Korea relies on the Middle East for 70% of its oil and 20% of its natural gas, meaning rising crude oil prices are inevitably reflected in corporate production costs and consumer prices. On top of this, the won-dollar exchange rate has been severely shaken by uncertainty over U.S. tariff pressure. Concerns over high interest rates are also amplifying amid instability in global financial markets. The possibility that the Iran war could sweep Korea's economy into a compound crisis of "triple highs" — high inflation, a high exchange rate, and high interest rates — cannot be ruled out.
An even greater concern is that as the Iran war shows signs of dragging on, fears of "stagflation" — economic stagnation coupled with high inflation — are emerging. If commodity supply disruptions accelerate price increases during a prolonged phase of low growth, Korea's economy faces a serious risk of becoming a victim of stagflation.
The government has prepared a 25 trillion won supplementary budget to respond to the economic crisis stemming from the Iran war and plans to submit it to the National Assembly on the 31st. However, such stopgap measures alone will be insufficient to dispel the "triple-threat and stagflation fears." Overcoming the compound crisis at hand urgently requires bold structural reform and the discovery of new growth engines. This is precisely why international organizations including the OECD have recommended that Korea strengthen its fiscal capacity and boost productivity through structural reforms in labor and education. While emergency measures such as diversifying energy suppliers and securing essential raw materials are immediately needed to overcome the Middle East energy crisis, over the medium to long term, the government must channel all efforts into diversifying core industries by boldly dismantling outdated regulations that are holding back advanced industries. If the government and political circles delay structural reforms — including deregulation and labor reform — out of concern for voter sentiment, escaping the quagmire of entrenched low growth will remain elusive.