In the April edition of its "KDI Monthly Economic Trends," the institute said that while domestic demand and exports had been showing signs of gradual improvement, the "volatility stemming from the Middle East war, combined with surging international oil prices, is expanding downward pressure on the economy."
ICT-led export boom hampered by soaring oil prices
Economic indicators through February remained generally positive, KDI reported.
On the production side, the service sector maintained steady growth, and the manufacturing sector expanded its gains, bolstered by a surge in semiconductor output. Exports continued a robust upward trajectory, particularly in ICT items such as semiconductors (140.5 percent) and computers (176.6 percent), driven by strong demand related to artificial intelligence (AI).
Consumption also showed a moderate recovery, with average retail sales for January and February rising 2.7 percent year-on-year, excluding the seasonal distortion of the Lunar New Year holiday. Facility investment also performed well, increasing by an average of 9.3 percent in the first two months, centered on the semiconductor industry.
The landscape, however, shifted abruptly in March following the outbreak of the conflict. The price of Dubai crude, South Korea’s benchmark, skyrocketed from $68.4 per barrel in February to $128.5 in March. Consequently, consumer prices in March rose 2.2 percent year-on-year – up from 2.0 percent in February – with petroleum product prices jumping 9.9 percent.
Sinking sentiment and financial market volatility
These escalating uncertainties are weighing heavily on economic sentiment, KDI said. The Composite Consumer Sentiment Index (CCSI) plummeted to 107.0 in March from 112.1 in February, while the Business Survey Index (BSI) also retreated across the manufacturing and non-manufacturing sectors.
Financial market volatility has intensified as well. Driven by safe-haven demand and concern over the country’s reliance on Middle Eastern oil, the won-dollar exchange rate climbed into the 1,500 won range. Meanwhile, the benchmark KOSPI index dived from 6,244.1 at the end of February to 5,052.5 by the end of March.
While the labor market showed some relief as the number of employed persons increased by 234,000 in February following the resumption of government job programs, employment among people in their 20s remained sluggish.
"The inflationary pressure and global economic instability caused by the Middle East war could worsen export conditions and constrain investment," the report said.
The think tank warned that increased costs for building materials are emerging as a significant headwind, likely delaying new projects, and hindering a rebound in construction investment.
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