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Drop in Oil Prices Boon to Korean Economy
Favorable Economic Factors
Drop in Oil Prices Boon to Korean Economy
  • By matthew
  • January 8, 2015, 05:00
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Five government research institutes – the Korea Development Institute, Korea Institute for Industrial Economics & Trade, Korea Institute of Finance, Korea Energy Economics Institute, and Korea Institute for International Economic Policy – released a collaborative research report on Jan. 7 and predicted that Korea’s economic growth rate will go up by 0.2 percentage points, inflation rate will fall by 0.4 percentage points, and current account balance will increase to US$10.21 billion if the international oil price drops to US$49 per barrel on annual average.

“Assuming that the oil price remains at slightly over US$60 per barrel and the global economy shows a moderate recovery, the economic growth and inflation rates are estimated to rise and fall by 0.1 percentage points, respectively,” the report read, continuing, “In this case, the current account balance increment is expected to reach US$5.25 billion, while the real income and saved oil import expenses add up to 30 trillion won and US$30 billion each.”

According to the report, the growth rate and income gain 0.2 and 0.3 percentage points each when the petroleum price drops 10 percent due to supply-side factors alone. But the figures will be limited to 0.02 and 0.2 percentage points if the drop in oil prices is caused by both supply and demand-side factors, examples of the latter including slow global economic growth.

“When the petroleum price falls 10 percent, the purchasing power of the entire national economy increases by 9.5 trillion won [US$8.6 billion], which is equivalent to 0.76 percent of the GDP,” it added, forecasting that 54.8 percent and 17.8 percent of the increment will go to households and the government, respectively.

The government is also considering that the recent low oil prices are beneficial for the Korean economy. “Concerning production costs, for example, the cost-saving effect from the drop in oil prices is seen to be much greater in Korea than in China and Japan,” Deputy Prime Minister Choi Kyung-hwan remarked on Jan. 7, adding, “I assume the recent trend will be a boon to export and investment alike.”