Bank of Korea May Downgrade Growth Forecast for This Year (Comprehensive)

Revised Economic Outlook on the 27th
Growth Rate Forecast Adjustment Inevitable Amid Signs of Prolonged COVID-19 Pandemic

[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 revise downward its economic growth forecast for this year. The unexpected prolonged outbreak of the novel coronavirus is showing signs of continuation, making the chain impact on not only exports but also domestic consumption, production, and investment sectors more visible. There are even negative projections suggesting that achieving a 2.0% growth rate this year may be difficult, deepening the Bank of Korea’s concerns. The Bank of Korea had presented a growth forecast of 2.3% last November. That forecast reflected the global trend of easing protectionism, such as the US-China trade agreement.

On the 5th, an official from the Bank of Korea’s Research Department stated, "We are currently estimating growth forecasts based on three scenarios: 'intensification,' 'mitigation,' and 'intermediate (baseline)' regarding the novel coronavirus situation," adding, "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 behind 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 Downgraded... Growth Forecast Assumptions Lowered= The global economic outlook, trade volume, and commodity markets (oil prices) are the 'assumptions' on which the Bank of Korea bases its growth forecasts. To reflect the impact of the world economy, certain conditions are assumed to calculate growth rates. Recently, due to the novel coronavirus fallout, all external conditions have turned negative. With Chinese factories halted, global trade volume is expected to decline, and oil prices have fallen to their lowest level in over a year. If international oil prices fall further below $40, countries like Korea, which have high external dependence, may face economic shocks due to falling export prices.

Institutions forecasting a sharp decline in China’s economic growth rate are increasing. China’s share of the global economy is known to be around 16%, so the impact on Korea is significant. According to the Ministry of Trade, Industry and Energy, China accounted for 25% of Korea’s total exports of $542.4 billion last year. Goldman Sachs, Standard & Poor’s (S&P), and others have predicted that the novel coronavirus could reduce China’s growth rate by about 1 percentage point this year.

The Bank of Korea has its own band estimating the impact on Korea if China’s growth rate falls by 1 percentage point, which is around the low 0% range. However, the Bank is concerned about how the cause of China’s growth decline affects the impact. If the decline is due to internal Chinese issues, the effect on Korea would mainly be limited to trade.

◆Domestic Consumption Shock is the Biggest Variable= 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 within Korea at present, the likelihood of the impact extending from consumption to production (work stoppages) and then to exports is low.

Therefore, the government and the Bank of Korea are monitoring daily credit card approval trends and sector-specific impacts. Consumption data have not yet been compiled since the outbreak. A Bank of Korea official said, "Credit cards can serve as a proxy indicator," but added, "Recently, online shopping and mobile payments have become 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. To prevent the spread of the novel coronavirus, the Chinese government has banned overseas group tours, and the Korean government has restricted visits by Chinese nationals, potentially causing a sharp drop in tourist numbers. According to data from the Ministry of Culture, Sports and Tourism, Chinese tourists accounted for 34.4% of foreign visitors in 2019 (provisional). In 2018, Chinese tourists ranked second in per capita spending among foreign visitors, with $1,887, so the impact from a decrease in overseas travelers cannot be ignored.

There are already talks that the government has effectively 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 could affect the real economy depending on how the situation develops," 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 Hong’s remarks as hinting at the possibility of a downward revision of the economic forecast.

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