Korean economy hit by Middle East turmoil just as recovery hopes rise

Gasoline and diesel prices are displayed at a gas station in Seoul on June 22. / Yonhap News

The recent U.S. attack on Iran has thrown cold water on Korea’s efforts to shift economic momentum. Rising international oil prices are fueling inflationary pressures at home while raising concerns over a logistics crisis and increased production costs. The KOSPI, which recently rebounded past the 3,000 mark for the first time in three and a half years, is now facing renewed volatility. There are also growing fears that the economic boost expected from a supplementary budget may be offset. On June 22, the Ministry of Economy and Finance held an emergency meeting to discuss its response.

The government’s top concern is international oil prices. With its high dependence on overseas energy, Korea is particularly vulnerable to oil price hikes, which tend to drive up domestic inflation.

Brent crude futures, for example, surged from $74.23 per barrel on June 13 (local time), the day of the Israeli strike on Iran, to $77.01 by the 20th. Gasoline prices in Seoul also rose to over 1,721 won per liter on the 21st. Typically, domestic fuel prices follow international oil prices with a 2 to 3 week lag. Korea Investment & Securities warned in a report published on the 17th that “if oil prices climb to around $100 per barrel by July and remain 20 percent higher year-on-year, Korea’s consumer inflation could rebound to the high 2 percent range in the fourth quarter.”

Concerns over supply chain disruptions are also mounting. Shipping costs for vessels passing through the Strait of Hormuz could spike, and in a worst-case scenario where the strait is blocked, a global energy supply crisis would be inevitable. Roughly 20 percent of the world’s oil consumption flows through the Strait of Hormuz.

Financial markets are expected to see short-term turbulence as well. After steadily rising since the presidential election on June 3, the KOSPI closed at 3,021.84 on June 20, breaching the 3,000 level for the first time in 3.5 years, but may now pause for breath. If the conflict escalates, demand for safe-haven assets like the U.S. dollar is likely to rise, weakening the Korean won. Korea Investment & Securities predicted that “if the situation develops into a full-scale war, the won-dollar exchange rate could exceed 1,400 won.”

The war adds to the burden amid an already slowing export environment. While the Middle East is not one of Korea’s major export destinations, global trade may still suffer due to mounting uncertainties in the global supply chain. The heightened risk of stagflation, a combination of inflation and economic stagnation, in the U.S. due to the war is also a contributing factor to the slowdown in Korea’s exports to the U.S. The government's plan to stimulate the economy through a second supplementary budget may also be disrupted. If inflationary pressure intensifies, the Bank of Korea could delay its anticipated interest rate cuts. Kim Kwang-seok, head of economic research at the Institute for Korean Economic and Industry, warned, “If uncertainty continues to grow, companies will scale back on new investments and business expansion, significantly offsetting the impact of the supplementary budget.”

On the same day, First Vice Minister Lee Hyung-il, acting as Minister of Economy and Finance, instructed relevant agencies to “implement necessary measures swiftly in close inter-agency coordination should any unusual developments arise.”

※This article has undergone review by a professional translator after being translated by an AI translation tool.