OECD sharply cuts this year’s Korea growth forecast

Protracted war raises energy burden

2.1 → 1.7%…Japan holds at 0.9%

Second-largest downward revision among the G20

The Organisation for Economic Co-operation and Development (OECD) on the 26th made the second-largest downward revision among the Group of 20 (G20) to South Korea’s economic growth forecast. In December last year, it expected the Korean economy to grow 2.1% in 2026, but cut the projection to 1.7% just three months later. The OECD said this reflects concerns that South Korea’s production activity, which is highly dependent on energy from the Middle East, could be hit as the U.S.-Iran war that broke out in late February shows signs of becoming protracted.

In its 'Interim Economic Outlook' report released the same day, the OECD put South Korea’s growth forecast for this year at 1.7%. In December, it had offered the highest 2026 growth forecast for Korea among major domestic and international institutions at 2.1%, but lowered it by 0.4% points within three months. Korea’s downgrade is the second-largest among G20 countries, after the United Kingdom (0.5% points). The euro area was revised down by 0.4% points, while Germany, France and Italy each saw a 0.2%-point cut.

The figure is seen as reflecting headwinds such as supply-chain instability stemming from the Middle East situation, rising energy prices and heightened volatility in the won-dollar exchange rate. The OECD assessed that “for Asian countries such as Korea with a large share of energy imports from the Middle East, a prolonged war could make energy supply and demand unstable, weighing on production activity.”

Meanwhile, Japan, which is also heavily reliant on the Middle East like Korea, kept its growth forecast unchanged at 0.9%. The OECD said “as higher energy import costs offset demand expansion from a new, expansionary fiscal stance, growth in 2026 is expected to slow from last year’s 1.2%.” This leaves room for the interpretation that Prime Minister Sanae Takaichi’s large-scale fiscal expansion has compensated for the downward pressure on growth from the Middle East situation.

The OECD also kept its global growth forecast for this year unchanged at 2.9%. It explained that “while the global economy was initially assessed to grow by about 0.3% points, the Middle East situation lowered growth by 0.3% points.”

Among major domestic and international institutions, the OECD is the first to cut its growth forecast to reflect the fallout from the Middle East war. The Bank of Korea and the Korea Development Institute (KDI), in mid-to-late February just before the war broke out, had raised their growth forecasts for this year to 2.0% and 1.9%, respectively.

The International Monetary Fund (IMF) also presented a 1.9% growth forecast, up 0.1% points from October last year. If the OECD’s forecast proves accurate, the government’s goal of lifting this year’s growth rate to 2.0%—above the potential growth rate (1.8%)—would become difficult to achieve. The OECD presented next year’s Korea growth rate at 2.1%, unchanged from its December forecast.

Reporter Nam Jeong-min peux@hankyung.com