Yejungcheo "If China's Growth Rate Drops by 1%P Due to COVID-19, South Korea's Will Decrease by 0.22%P"

Last Year, 6,024,200 Chinese Nationals Entered... 50% Decrease Could Reduce Tourism Revenue by About 6 Trillion Won

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] It has been forecasted that if China's economic growth rate falls by 1 percentage point due to the novel coronavirus disease (COVID-19) outbreak, South Korea's growth rate could also decrease by up to 0.22 percentage points as a result.

On the 23rd, the National Assembly Budget Office (NABO) analyzed this in its 'Economic and Industrial Trends & Issues' report. The estimate was based on the correlation established between the two countries' economic growth over the past 20 years. Given the uncertainties regarding the spread and duration of the outbreak, NABO set three scenarios to analyze the impact on the Korean economy.

Specifically, the transmission channels of the impact from China's economic contraction were examined by categorizing total demand components such as external demand, private demand, and government demand.

First, if the infection spread is limited to China and the shock is confined to a decrease in external demand, South Korea's growth rate decline is estimated to be 0.09 percentage points.

Next, if fiscal execution is timely and government demand is not significantly affected due to policy responses, the decline in South Korea's growth rate is estimated at 0.19 percentage points.

Finally, if the domestic demand contraction accompanies the economic shock in China, South Korea's growth rate is expected to fall by 0.22 percentage points.

NABO observed, "If COVID-19 spreads to major countries and global trade and growth contract, the negative impact on the Korean economy is likely to increase."

NABO analyzed that the transmission channels of COVID-19's impact on the Korean economy include non-resident domestic consumption, consumer spending, industrial production, and export contraction in both the short and long term.

Considering that Chinese tourists constitute a significant portion of visitors to South Korea, it is expected that restrictions on entry and other measures will reduce the influx of Chinese tourists, causing a contraction in non-resident domestic consumption until the situation stabilizes.

According to the Korea Tourism Organization, the number of Chinese nationals entering South Korea last year was 6,024,200 (provisional), accounting for 34% of all entrants.

Also, the average expenditure per Chinese entrant was $1,683 as of the third quarter of last year. If the number of Chinese tourists decreases by 50%, annual tourism revenue is projected to decline by approximately $5.07 billion (about 6 trillion KRW).

Regarding consumption, NABO predicted that due to anxiety about COVID-19 infection, the domestic market will contract, causing short-term shocks in retail, transportation, and restaurant industries.

From an industrial perspective, if the situation prolongs, it is expected that South Korea's manufacturing production and exports will also contract due to sluggish domestic demand in China and disruption of the global value chain.

A decrease in exports to China, which accounted for 25.1% of South Korea's exports last year, is anticipated due to the contraction of China's domestic market. There are concerns about reduced production and exports in major manufacturing sectors, such as the automobile industry, which sources parts from China. NABO recommended timely fiscal execution in the first half of the year, when the risk of economic downturn due to reduced consumer spending and industrial production contraction is high, to minimize downside risks caused by COVID-19.

NABO stated, "Among the three scenarios, when government demand is not significantly affected, the decline in South Korea's economic growth rate decreases (from 0.22 percentage points to 0.19 percentage points), so it is necessary to enhance the timeliness of fiscal execution."

It added, "If the situation prolongs and the number of domestic COVID-19 patients increases, worsening the situation, it will be necessary to consider a policy mix including fiscal and monetary policies to respond to the risk of economic recession."

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