KDI Says Rising Prices and Production Costs Pose Downside Risks to the Economy

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[Financial News] On the 8th, the Korea Development Institute (KDI) said that recent conditions in the Korean economy still face downside risks, as disruptions to crude oil transport caused by the war in the Middle East continue to drive up consumer prices and production costs.
In its 'June Economic Outlook' released that day, KDI said the negative impact is becoming visible, including lower petroleum refining output and reduced export volumes of petroleum products due to supply disruptions caused by the war in the Middle East.
KDI also said consumer prices have been under pressure, as high international oil prices pushed both CPI and core inflation sharply higher.
Consumer prices rose 3.1% in May, up from 2.6% in the previous month, led by goods prices, which accelerated from 2.7% to 3.5%.
The main driver was the surge in petroleum product prices, which jumped from 21.9% to 24.2% amid prolonged high oil prices.
Dubai crude prices rose sharply to $128.5 in March, right after the outbreak of the war in the Middle East. They then remained in the $103 to $105 range in April and May.
Core inflation also came in at 2.5%, up from 2.2% in the previous month. Price increases for oil-dependent items such as airfares widened, driving the rise in core inflation. Inflation expectations also stayed at a high level of 2.7% to 2.9%.
High oil prices are also negative for construction investment.
KDI said cost increases stemming from the war in the Middle East are likely to constrain any recovery in the construction sector. As prices of some construction materials surged, the construction completed deflator, which reflects construction costs, rose sharply from 2.1% in February to 4.6% in April. Construction completed in April fell 5.5%, following a 5.8% decline in the previous month, indicating that the weakness is continuing.
Even so, KDI gave a positive assessment, saying, "Despite downside risks to the economy from the war in the Middle East, our economy is still maintaining a modest recovery led by the semiconductor boom."
Consumption has continued to improve on a three-month moving average basis, even though the Retail Sales Index's increase slowed from 5.0% to 1.6%. KDI said, "The recovery in consumer sentiment is likely to continue, as the CCSI rebounded in May from 99.2 to 106.1." It added that the high oil price relief payments distributed from the end of April could act as a positive factor for consumption going forward.
Overall industrial production in April also continued its gradual improvement, rising 2.4% after 3.7% in the previous period.
KDI also viewed exports and facility investment positively, saying they are continuing to post strong growth, led by semiconductors.
skjung@fnnews.com Jung Sang-gyun Reporter