Speeding up economic recovery is one of Korea's top priorities this year. Yet dark clouds are gathering over the economy as the country faces growing downside risks such as the fallout from the Russian invasion of Ukraine, not to mention the prolonged COVID-19 pandemic. The March 9 presidential election is also feared to increase uncertainties over the economic outlook.
The Ukraine crisis could have farther-reaching impact on the global economy than previously thought, if the war drags on. The U.S.-led economic and financial sanctions against Russia could deal a severe blow to Korea whose economic growth is highly dependent on exports. A ban on exports of strategic materials to Russia is likely to put a damper on Korea's overseas shipments of major items such as semiconductors.
This is not the time for complacency, given the stringent international sanctions against Russia. The most direct and immediate impact of the war is a surge in oil prices in global markets. Brent crude closed at $118.11 per barrel Friday, the highest since 2008, while West Texas Intermediate and Dubai crude jumped to $115.68 per barrel and $114.95 per barrel, respectively. The oil prices are likely go up further if the U.S. bans imports of Russian crude oil.
Higher oil prices will push up production costs for manufacturing goods, aggravating the profitability of Korean exporters. More seriously, they will fuel inflation which has already soared due to global supply chain disruptions and higher prices of commodities and raw materials. All these are raising fears about stagflation.
Korea reported a 3.7 percent rise in consumer prices in February from a year earlier, driven by soaring oil prices. What's notable is that the inflation rate stayed above 3 percent for the fifth month straight. The Bank of Korea (BOK) revised up its 2022 inflation projection to 3.1 percent last month from the 2 percent projection it made in November. Yet some forecast inflation to exceed 4 percent this year for the first time in 11 years. Nevertheless, the central bank left its 2022 economic growth projection unchanged at 3 percent. However, pessimism is increasing that the economy may not grow that much.
Industrial and consumption data also augur ill for the economy. According to Statistics Korea, industrial production dropped by 0.3 percent in January from the previous month, the steepest fall since last July. Retail sales, a gauge of private spending, also fell 1.9 percent, the largest dive since July 2020. The country cannot avert stagflation if the trend continues.
The Moon Jae-in administration should do everything it can to minimize the impact of the Ukraine crisis, while trying to check the spread of the Omicron variant. It also needs to closely monitor U.S. moves toward interest rate hikes and a potential economic slowdown in China. Korea must go all-out to achieve sustainable growth regardless of who will become the next president in May.