The Bank of Korea May Downgrade Growth Forecast for This Year

Economic Impact Inevitable as Prolonged Situation Looms
"Assessing Economic Growth Rates by Novel Coronavirus Scenarios"

[Asia Economy reporters Eunbyeol Kim and Sehee Jang] As the novel coronavirus infection (Wuhan pneumonia) crisis spreads, the Bank of Korea is increasingly likely to release a revised economic outlook on the 27th, lowering its previous forecast (2.3% growth this year). The unexpected prolonged novel coronavirus situation is showing signs of continuation, making the chain impact on not only exports but also domestic consumption, production, and investment sectors more visible. Negative forecasts have even emerged suggesting that achieving a 2.0% growth rate this year may be difficult, deepening the Bank of Korea’s concerns.

On the 5th, an official from the Bank of Korea’s Research Department stated, "We are currently estimating growth rate forecasts by dividing the novel coronavirus situation into three scenarios: 'intensification,' 'mitigation,' and 'intermediate (baseline).'" He added, "We plan to disclose the results estimated under the intermediate scenario in the revised economic outlook on the 27th." At present, there is strong weight on the possibility that the Bank of Korea will lower its growth forecast. Although data after the Lunar New Year holiday, when the novel coronavirus spread, have not yet been released, there is no disagreement that tourism and domestic demand have been hit.

Global economic outlook, trade volume, and commodity markets (oil prices) are the 'assumptions' the Bank of Korea uses to forecast growth rates. They calculate growth rates based on certain assumptions to reflect the impact of the global economy. Recently, due to the aftermath of the novel coronavirus, all external conditions have appeared negative. Chinese factories have stopped, leading to a forecasted decrease in global trade volume, and oil prices have fallen to their lowest level in over a year. If international oil prices plunge further below $40, countries with high external dependence like Korea may face economic shocks due to falling export prices.

Institutions forecasting a sharp decline in China’s economic growth rate are increasing. China is known to account for 16% of the global economy, and its impact on Korea is significant. According to the Ministry of Trade, Industry and Energy, last year’s total export amount was $542.4 billion, with exports to China accounting for 25%.

The Bank of Korea has its own band for the 'impact on Korea if China’s growth rate falls by 1 percentage point,' which is in the low 0% range. However, the Bank of Korea’s concern lies in the fact that the impact may vary depending on the reasons behind China’s growth rate decline. If the decline is due to internal Chinese issues, it mainly affects Korea through trade.

The key issue is how severely and for how long domestic consumption is affected. Experts agree that since the novel coronavirus is not spreading rapidly domestically at present, the possibility of a chain impact from consumption to production (work stoppages) to exports is low. The government and the Bank of Korea are monitoring daily credit card approval amounts and the impact by industry. A Bank of Korea official said, "Credit cards can also serve as a proxy indicator," but added, "Recently, online shopping and mobile payments have been active, so the consumption shock may not be as severe as during the Middle East Respiratory Syndrome (MERS) outbreak."

The sharp decline in Chinese tourists is also a negative factor. The Chinese government has banned overseas group tours to prevent the spread of the novel coronavirus, and the Korean government has also restricted visits by Chinese nationals, leading to a scenario where the number of tourists could sharply decrease. According to data from the Ministry of Culture, Sports and Tourism, as of last year (provisional), 34.4% of foreign tourists were Chinese. In 2018, Chinese tourists ranked second in per capita spending among foreign visitors at $1,887, so the impact from a decrease in overseas travelers cannot be ignored.

There are already talks that the government has signaled a downward revision of the economic outlook. On the 3rd, Deputy Prime Minister and Minister of Strategy and Finance Hong Nam-ki said, "The novel coronavirus infection may affect the real economy depending on the progress of the situation," adding, "The most evident impact in the indicators is the reduction in inbound tourists." A senior official from the Ministry of Strategy and Finance interpreted, "Deputy Prime Minister Hong’s remarks hinted at the possibility of a downward revision of the economic outlook."

This content was produced with the assistance of AI translation services.