KDI raises warning about Ukraine turmoil

A customer pumps fuel at a gas station on Monday. The rising international oil price is the latest area that is affected by the ongoing conflict between Russia and Ukraine. [YONHAP]

State-owned think tank Korea Development Institute (KDI) raised concerns about the war in Ukraine's effect on the Korean economy.

In an economic assessment released Monday, the KDI noted that Korea’s economy is seeing moderate recovery from the pandemic thanks to robust exports.

Last week, Statistics Korea reported that industrial output rose 4.3 percent in January compared to a year ago despite the spread of the Omicron variant of Covid-19.

A 34.3 percent increase in semiconductor production helped boost overall production, even as automobile production fell more than 9 percent.

The KDI report noted an increase in service activity, which was up 4.8 percent year-on-year, and consumer spending.

The think tank also saw 1 million more people employed in January compared to a year earlier as a positive sign.

The impact of Covid-19 on the economy seems to be fading, it said. Russia’s invasion of Ukraine has emerged as the new threat, particularly to Korea’s exports.

“Exports maintained high growth in most items,” the report noted. “But uncertainties are running high on the recent geopolitical risks.”

Exports grew 20.6 percent in February on-year, faster than the 15.2 percent increase in January.

The KDI said the global economy is likely to slow as the crisis in Ukraine comes on top of sizzling rates of inflation.

“For the time being, global industrial production and trade in goods maintain modest growth,” the report said. “However, as economic sanctions against Russia come into full force, concerns over supply chain instability and rising raw material prices are growing again.”

Consumer prices in Korea have grown above 3 percent for five straight months -- longer than at any other time in the last decade.

The longest stretch of prices rising more than 3 percent was 18 consecutive months starting in September 2010.

In January, U.S. inflation was the highest in 40 years.

“The U.S. is exhibiting slower growth in real indicators and higher inflationary pressure, which points to high economic uncertainty,” the KDI said. “As the labor market maintains a sound recovery trend and consumer price continue to soar, its [U.S.] government is likely to speed up the pace of monetary tightening including interest rate increases.”

The KDI saw the Eurozone in stagnation with downward pressure increasing, which would not be good for Korea’s exports.

“A few sentiment indices for the service industry exhibited some improvements but major indicators such as consumption and production remained in a slump,” KDI noted.

The situation for China, Korea’s biggest trade partner, is also considered unfavorable with weak consumption and investment caused by strict Covid-19 measures.

The KDI said such an unfavorable situation is making Korean financial markets volatile.

“As of the end of February, the Kospi closed at 2,699.2, slightly up 1.3 percent from a month ago with elevated volatility in reaction to the escalating Ukraine crisis,” the report said.

It noted the government bond yield was up 5 basis points, also affected by the Russia-Ukraine conflict.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]