Korean economy faces heightened external economic risks: KDI

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The Korean economy is on a recovery track, but external economic uncertainty remains high amid soaring energy costs and monetary policy shifts by the U.S. Federal Reserve, a state-run think tank said Wednesday.

The manufacturing industry has extended solid growth and the latest spike in COVID-19 cases appears to have had limited impacts on the services sector, compared to previous waves of the pandemic, the Korea Development Institute (KDI) said in a monthly economic assessment report.

"However, a continued rise in raw material prices and unstable financial markets indicate economic uncertainty remains high," the report said.

The Korean economy is on a recovery path on the back of robust exports of semiconductors and autos. Asia's fourth-largest economy expanded 4 percent last year, its fastest growth in 11 years.

Private spending gained ground in the fourth quarter despite the upsurge in COVID-19 cases in the latest sign that the negative impact of the pandemic on the services sector appears to have declined.

Private spending grew 1.7 percent in the fourth quarter of last year from the previous three months, a turnaround from a 0.2 percent quarter-on-quarter fall, according to central bank data.

But external economic risks have increased amid surging oil prices and uncertainty about monetary policy normalization by the Fed.

Korea's exports rose 15.2 percent year-on-year in January to a monthly record high of $55.32 billion; but the country logged its largest trade deficit last month as a hike in oil prices raised import bills.

Oil prices have spiked on tight supplies and escalating geopolitical tensions between Russia and Ukraine.

Dubai crude, Korea's benchmark, soared to $90.91 per barrel Monday, up from $77.12 at the end of last year. Korea depends mainly on imports for its energy needs.

Volatility in the financial market has also increased amid the prospects that the Fed is likely to accelerate its monetary tightening.

The Korean currency has fallen sharply against the U.S. dollar in recent months with the won dropping to a 19-month low of 1,206.40 per greenback Feb. 3. Yields of three-year government bonds rose 6.6 basis points to 2.303 percent Tuesday, the highest in nearly four years.

The Bank of Korea expects the Korean economy to grow 3 percent this year after 4 percent growth last year. The finance ministry puts its 2022 economic growth outlook at 3.1 percent. (Yonhap)