Southeast Korea needs 6.7% annual growth for 5 years to recover from Iran war shock

Southeast Korea has taken a harder economic hit from the Iran war than the rest of the country. Assuming the broader economy expands at 2% per year, the region would need annual average growth of 6.7% over the next five years — or 4.3% over 10 years — to return to the national growth trajectory, according to a new report.

BNK Management Research Institute, an affiliate of BNK Financial Group, published the report Monday, titled "The Iran War's Fallout and Its Impact on Southeast Korea's Economy." Manufacturing output in the region fell 2.1% year-on-year in May, dragged down by weakness in oil-based industries including petrochemicals, refining, and rubber and plastics. Export volumes dropped 22.0% over the same period — the steepest decline in 64 months.

The institute said the region's key economic indicators — industrial output, exports and employment — have deteriorated rapidly since the second quarter as the effects of the Iran war took hold. The labor market also slowed, with job growth weakening across retail, accommodation and food services, and construction. The number of employed people rose by just 6,000 from a year earlier.

The report also raised the possibility that the war could widen the growth gap between the national economy and southeast Korea. The institute estimated that if the national economy grows at an average of 2% per year, the region would need annual average growth of 6.7% within five years, or 4.3% within 10 years, to return to the national average growth trajectory.

The institute attributed the region's outsized vulnerability to what it called a "R.I.S.K. economic structure" — an acronym describing four industrial characteristics that leave the area exposed to Middle East shocks: refining and petrochemical concentration, import dependence on Middle Eastern oil, shipping and port logistics exposure, and a key export-oriented industry cluster.

The outlook for the second half of the year is also dim. Global supply chains damaged during the war are unlikely to recover quickly, and uncertainty from post-war negotiations is expected to persist. Compounding the pressure, the region faces a triple burden of high interest rates, high inflation and a weak won, the institute said.

The war's effects have also fed through to consumer prices. South Korea's consumer price inflation reached 3.2% in June, the highest in 30 months since December 2023. Disruptions to crude oil supply pushed up production costs, logistics expenses and public utility charges. The inflation rate stood at around 2.0% in January and soared to 3.2% within five months.

The institute called for swift support from local governments and financial institutions for affected businesses and vulnerable groups. For structurally weak companies, it recommended exploring a soft-landing approach — including business-transition consulting and tax support — to minimize market disruption.

Over the medium to long term, the institute said the region needs to strengthen industrial competitiveness and improve its economic fundamentals. It said the industrial structure should be upgraded through the advancement of core industries, the cultivation of knowledge-based services, and the expansion of eco-friendly and AI-driven advanced industries, alongside investment in talent development and a stronger social safety net.

"Southeast Korea's economy has repeatedly shown a pattern of absorbing bigger shocks than the rest of the country when external crises hit, and recovering more slowly," said Baek Chung-gi, a senior research fellow at BNK Management Research Institute. "This is the moment for bolder innovation to build an industrial base that is resilient to crises and an economic structure with stronger recovery capacity."