Projections now suggest Korea's economy may grow only 1% this year amid the fallout from the Iran conflict. French investment bank Natixis cut its forecast for Korea's real GDP growth from 1.8% to 1.0%, well below the Bank of Korea's 2.0% projection and the OECD's 1.7% estimate. Natixis predicted Korea's consumer inflation would reach 4.2% this year, warning that "emerging Asian economies [including Korea] will face a stagflationary environment." UK research firm Capital Economics also lowered its growth forecast for Korea from 2.0% to 1.6%.
Global institutions are turning pessimistic on Korea's economy due to its structural vulnerability to high oil prices. Korea sources approximately 70% of its crude oil imports and 20% of its liquefied natural gas from the Middle East. Given this economic reality, surging international oil prices deliver direct shocks to businesses and households. Bank of Korea Governor Changyong Rhee reflected this concern when he said, "If the worst-case scenario materializes, including destruction of energy infrastructure, it would be difficult to rule out the possibility of stagflation." Against this backdrop, Brent crude futures surged as much as 9.1% intraday to $103.87 per barrel on the 13th amid escalating tensions between the US and Iran over potential Strait of Hormuz blockades.
It is premature to conclude that Korea's economy will enter stagflation at this stage. The government is responding with emergency measures, including accelerating execution of a 26.2 trillion won ($19.3 billion) supplementary budget amid heightened vigilance over the Middle East-driven economic crisis. However, once stagflation takes hold, escape becomes difficult. Raising interest rates to curb inflation deepens recession, while cutting rates to stimulate growth triggers price spikes—a classic policy dilemma.
The moment demands swift and comprehensive responses to stagflation fears. Above all, the fundamental solution to breaking through this crisis must be found in expanding energy supply chains and reinvigorating corporate investment. Korea must diversify its Middle East-dependent energy supply and eliminate regulations that shackle businesses. Only by mobilizing national capabilities to create a business-friendly environment can Korea's economy escape stagflation fears.
