Middle East Shock Tests Korean Economic Resilience

By Dominic Brown

Weeks into the ongoing Middle East conflict, significant uncertainty persists regarding its duration and the path to de-escalation. Despite intensified diplomatic efforts, the timing and nature of any resolution remain unclear. In this evolving global landscape, it is crucial to analyze how prolonged geopolitical disruption could impact **South Korea’s economy** and its vital **property markets**.

The potential disruption of the **Strait of Hormuz** continues to be a critical transmission channel for global economic impact. Before the conflict, approximately 20 million barrels per day of **crude oil** and refined products – representing 20-25 percent of the world’s seaborne oil trade – traversed this vital waterway. The **Asia-Pacific region** faces considerably higher exposure, with over 80 percent of its imported oil relying on this strategic route. **South Korea**, notably, exhibits a profound reliance on **Middle Eastern crude oil**, which constitutes around 70 percent of its total oil imports. Furthermore, an estimated 90 percent of Korea’s crude oil imports transit through the Strait of Hormuz, underscoring its vulnerability.

The most immediate and discernible impact has manifested in **fuel pricing**. While global oil consumption has seen a modest decline of only about 5 percent thus far – primarily due to coordinated releases from strategic reserves – the repercussions across Asia have been inconsistent. Major economies possessing substantial stockpiles have effectively cushioned supply shocks, whereas numerous emerging markets have contended with **fuel rationing** and consumption limitations.

Positioned uniquely, **South Korea** finds itself between these two extremes. The nation’s considerable strategic reserves and advanced refining capabilities have successfully prevented physical fuel shortages. Nevertheless, this advantage has not shielded the economy from significant price surges. **Gasoline prices in Korea** have escalated by 17 percent compared to 2025 levels, intensifying pressure on already high living costs.

**Equity markets** initially saw significant fluctuations, although volatility has notably subsided in recent weeks, allowing markets to reclaim most, if not all, of their initial declines. Concurrently, **bond markets** have also responded, with yields increasing as **inflation expectations** shift. Despite this period of market volatility, overall global business confidence has demonstrated remarkable resilience.

**South Korea** has largely mirrored this global market trend, yet with heightened sensitivity stemming from its substantial reliance on **energy imports** and **external trade**. Business confidence in Korea initially waned amidst escalating oil prices and a weaker currency, but has since exhibited signs of stabilization as geopolitical tensions have somewhat eased.

Conversely, **consumer sentiment in South Korea** presents a more challenging picture. Elevated **fuel prices**, escalating transport costs, and broader **inflation concerns** have exerted a more pronounced burden on households. Considering Korea’s pre-existing subdued domestic consumption environment – driven by substantial household debt and a softening housing market – this decline in sentiment poses a significant downside risk to economic recovery.

The **economic effects of the conflict** are now becoming increasingly apparent, with **inflation** serving as the most immediate transmission channel. Elevated **energy prices** directly contribute to headline inflation, but the more significant long-term risk stems from potential second and third-round inflationary pressures. Even if the conflict were to conclude suddenly, restoring **oil production** and **maritime trade** to pre-conflict capacities would require a considerable period.

Consequently, **inflationary pressures** are projected to endure beyond initial expectations. For **central banks** globally, this development complicates the monetary policy outlook. Although policymakers are inclined to view the initial supply-driven inflation surge as transitory, the window for near-term interest rate reductions has substantially diminished. The **Bank of Korea (BOK)** is anticipated to maintain a cautious stance, with restricted opportunities for immediate rate cuts despite ongoing growth concerns.

A less accommodative monetary policy environment is expected to negatively influence **economic growth**. As per **Moody’s Analytics**, the baseline regional growth forecast for 2026 has been revised downwards from 3.98 percent to 3.83 percent. Correspondingly, the **growth outlook for South Korea** has also been adjusted, with projected growth of 1.71 percent in 2026 and 1.96 percent in 2027, a decrease from earlier forecasts of 1.9 percent and 1.99 percent respectively.

The ramifications for **commercial real estate** will primarily manifest through shifts in the broader **macroeconomic environment**, rather than direct, immediate sector-specific shocks.

**Logistics and supply chains** are currently experiencing the most pronounced and immediate pressures. Escalating **fuel prices**, localized diesel shortages, and increased shipping insurance premiums are collectively driving up the cost of transporting goods within **South Korea** and across global trade routes. These heightened cost pressures are anticipated to lead to higher consumer goods prices, while potential **supply chain bottlenecks** could trigger intermittent supply disruptions. Furthermore, **construction activity** is vulnerable, as elevated transport and material costs could worsen the projected decline in new supply at the year’s outset.

The **retail sector in South Korea** is similarly susceptible to these evolving **supply chain dynamics**, with additional impacts expected through elevated consumer prices. As households adopt a more cautious approach to spending, consumption patterns are likely to pivot towards essential, non-discretionary items, with discretionary expenditure being reduced first.

**Office markets** typically confront more gradual risks. Specifically for **South Korea**, widespread adoption of working from home practices did not materialize significantly and is unlikely to be a predominant factor in the current climate. In the medium term, the primary risk emanates from the broader macroeconomic environment: any prolonged deceleration in employment growth would inevitably curb demand for **office space**. Nevertheless, vacancy rates in **Seoul’s office market** continue to be remarkably low, a factor that has bolstered strong rental growth and appreciating office values.

**Capital markets** commenced 2026 on a comparatively robust foundation. However, extended **geopolitical uncertainty** generally results in more discerning capital deployment and reduced transaction volumes as investors recalibrate their assumptions. While immediate upward pressure on yields is not currently anticipated, the pace of deals is expected to decelerate if this uncertainty continues. In the long term, investors might revise their strategies, prioritizing resilient sectors that provide defensive income streams and structural growth opportunities.

Dominic Brown is the head of International Research at Cushman & Wakefield. The views expressed in this column are solely his own. — Ed.

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