OECD cuts Korea’s growth outlook by 0.4 percentage points, flags ‘Middle East risk’

[Financial News] Domestic and overseas institutions and think tanks are increasingly betting on the possibility of a downward turn in the Republic of Korea (ROK)’s economic growth rate. As Middle East risks drive a sharp rise in global oil prices, the direction for the real economy is tilting downward. However, many analysts note that the outlook remains highly uncertain, making it difficult to gauge the full magnitude of the potential shock.
On the 29th, the United States of America (U.S.) and Iran were reported to be weighing a ceasefire proposal while at the same time preparing for a possible ground operation. This is seen as an attempt to strengthen their bargaining power, but depending on how events unfold, there is also a significant risk that the conflict could drag on into a prolonged war.
The Organisation for Economic Co-operation and Development (OECD), a major international organization, fired the opening shot of this downward trend by cutting ROK’s growth forecast for this year from 2.1% to 1.7%, a reduction of 0.4 percentage points.
While the OECD kept its global growth forecast unchanged at 2.9%, it sharply lowered the growth outlook for ROK and the Eurozone (from 1.2% to 0.8%). Observers interpret this as a judgment that the Korean economy is structurally more vulnerable, given its high external dependence and the large share of Middle Eastern crude oil in its energy imports.
In contrast, the growth outlook for the U.S., which has been at the center of the Middle East crisis, was revised up by 0.3 percentage points from 1.7% to 2.0%, reflecting factors such as the impact of artificial intelligence (AI). The growth forecasts for Japan (0.9%) and China (4.4%) were left unchanged from previous estimates.
Even the uncertainty surrounding the Middle East situation alone is expected to weigh negatively on growth. Following the OECD’s move, there are growing expectations that other research institutions will also start revising their forecasts.
Citigroup has lowered its growth forecast for ROK from 2.4% to 2.2%, a cut of 0.2 percentage points, while Barclays has revised its projection down from 2.1% to 2.0%.
An analysis by the Woori Finance Research Institute warns that if international oil prices continue to hover above 100 dollars per barrel, ROK’s annual economic growth rate could fall by more than 0.5 percentage points.
Gwangseok Kim, Head of the Economic Research Department at the Korea Institute for Industrial Economics and Trade (KIET), explained, "It appears that the OECD has made a fairly strong downward adjustment," adding, "The scale of the inflation adjustment is large, which implies that among OECD member countries, ROK has an economic structure that is particularly exposed to the direct impact of the energy shock."
The OECD also raised its forecast for ROK’s inflation this year by 0.9 percentage points, from 1.8% to 2.7%.
If inflation pushes interest rates higher, overall economic activity could weaken. There are also growing concerns that an energy shock originating in the Middle East could ripple through the real economy’s supply chains, starting with petrochemicals and extending to semiconductors. This is because many items in ROK’s supply chains rely heavily on Middle Eastern countries.
Disruptions are seen as inevitable not only in naphtha used in petrochemicals, but also in key materials for semiconductor production such as helium and bromine, affecting major industrial supply chains.
The government is pushing for an extra budget of around 25 trillion won, but many experts assess that this will not be enough to fully offset the shock coming from the Middle East.
Depending on how the Middle East situation develops, the likelihood is growing that ROK will find it difficult to achieve its 2.0% growth target for this year.

chlee1@fnnews.com Lee Chang-hoon Reporter