Prolonged Middle East war casts shadow over Korea's 2% growth goal

A man refuels his vehicle at a gas station in Seoul, Sunday, the third day of the government’s third round of a price cap on fuel introduced in response to rising global oil prices amid war in the Middle East. Yonhap

The prolonged U.S.-Israel war on Iran is putting growing pressure on Korea’s exports and other economic activity, casting doubt on the government’s 2 percent economic growth goal for this year, economists said Tuesday.

Following the outbreak of war in the Middle East in late February, downside risks to the Korean economy have grown. The country is expected to be hit particularly hard due to its heavy dependence on crude oil imports from the region, threatening the government’s growth target.

Recent forecasts from major economic institutions generally place Korea's 2026 growth in the upper 1 percent range.

The OECD lowered its outlook for Korea’s economic growth to 1.7 percent from 2.1 percent on March 26, marking a 0.4 percentage point decline, while the International Monetary Fund on Tuesday maintained its forecast for this year at 1.9 percent, unchanged from its January estimate. The Asian Development Bank and the ASEAN+3 Macroeconomic Research Office also projected growth at 1.9 percent.

The impact of the Middle East war had been relatively limited in key economic indicators last month. Consumer inflation rose slightly to 2.2 percent in March from 2 percent in February, remaining within the Bank of Korea’s (BOK) target range in the low 2 percent range. Exports, driven by strong semiconductor demand, also climbed to a record $86.13 billion in March.

However, some indicators have begun to weaken. The composite consumer sentiment index fell 5.1 points from a month earlier to 107 in March, marking the steepest decline in 15 months since December 2024, when the index dropped 12.7 points due to former President Yoon Suk Yeol’s martial law declaration.

The impact of the conflict is expected to become more evident in economic data from April onward. International oil prices, which have risen by nearly 50 percent compared to prewar levels, are likely to feed more directly into consumer prices starting this month.

If inflation accelerates sharply, it could weigh on domestic demand, while rising production costs for firms may, in turn, undermine exports.

“Upcoming economic indicators are likely to weaken. While the government expects a supplementary budget to boost growth by around 0.2 percentage points, such a measure alone may fall short of delivering the targeted 2 percent expansion," said Joo Won, head of research at Hyundai Research Institute.

Bank of Korea Gov. Rhee Chang-yong speaks during a press briefing following a Monetary Policy Board meeting at the central bank’s headquarters in Seoul, Friday. Yonhap

On Friday, the BOK’s Monetary Policy Board decided to keep the benchmark interest rate unchanged at 2.5 percent, citing elevated uncertainty. It explained that the Middle East conflict is simultaneously adding upward pressure on inflation and downward pressure on growth, while also heightening volatility in financial and foreign exchange markets.

The central bank also warned that the fallout from the conflict could drag this year’s growth below 2 percent and push inflation into the mid- to upper-2 percent range.

Adding to concerns, energy prices could remain elevated through the second half of the year if the conflict continues.

“It remains highly uncertain what will unfold after the two-week negotiation window between the United States and Iran," BOK Gov. Rhee Chang-yong said. "If energy infrastructure is damaged, the economic fallout could persist, and in a worst-case scenario, the possibility of stagflation cannot be ruled out.”