[Q&A] Bank of Korea: "This Year's Q1 Growth Rate May Fall Below -0.4%"

Checking COVID-19 Spread Status and Updating Indicators

Incorporating 'Government Supplementary Budget' into This Year's Economic Growth Forecast

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] Lee Hwan-seok, Director of the Research Department at the Bank of Korea, said on the 27th, "There is a possibility that this year’s first-quarter economic growth rate may fall short of last year’s first-quarter negative growth rate (quarter-on-quarter -0.4%)."

Director Lee stated at the economic outlook briefing held after the Monetary Policy Committee meeting that "In the current situation where the novel coronavirus infection (COVID-19) is spreading as it is, short-term negative impacts are inevitable."

Reflecting the impact of COVID-19, the Bank of Korea lowered its growth forecast for this year from the previous 2.3% to 2.1%, a 0.2 percentage point downward revision. The base interest rate was kept steady at 1.25% per annum.

Regarding the downward revision of the economic growth rate, Director Lee explained, "It reflects the level of domestic economic recovery and the contraction of economic sentiment due to the recent spread of COVID-19."

The following is a Q&A with Jeong Gyu-il, Deputy Governor of the Bank of Korea, and Director Lee.

▲ What are the estimated growth rates under different COVID-19 scenarios?

=The current growth forecast is based on the scenario with a high probability that the peak will be reached within March and conditions will improve thereafter. Since the continuation and duration of COVID-19 spread will vary depending on the situation, we will continue to update the forecast. However, it is difficult to disclose the results by each scenario or type.

▲ Is a V-shaped rebound expected in the second quarter after peaking in March?

=Economic shocks caused by epidemics like COVID-19 are not structural but temporary shocks. Negative impacts are concentrated initially, and once the spread is contained, suppressed activities tend to accelerate, which is a typical pattern. Since it is difficult to predict the spread of COVID-19, it is hard to definitively say there will be a sharp rebound in the second quarter, but the general pattern can be described as V-shaped.

▲ Does this year’s growth forecast reflect the government’s supplementary budget?

=We mentioned earlier that government policies have been reflected. Although the scale and details of the supplementary budget are not finalized, we understand that considerable discussions are underway. Based on past cases, we assumed a certain level and incorporated it. If the supplementary budget is approved in March, it is likely to be executed from the second quarter. Since the impact on the annual economic growth rate is greater if the supplementary budget is implemented earlier rather than in the fourth quarter, this expectation was also reflected.

▲ What is the basis for expecting employment in the service sector to increase?

=Looking at employment performance until December, the service sector improved significantly and the numbers increased. Considering the impact of COVID-19, employment is expected to rise in the first half of the year and decline in the second half. This is because the COVID-19 impact is seen as negative in the latter half.

▲ Why is there no change in the forecast for crude oil import prices despite recent oil prices falling below $50?

=Although oil prices have dropped sharply since January, they rose considerably after December due to the US-China trade agreement and conflicts in the Middle East. While the perceived price has dropped a lot after COVID-19, the actual oil price difference is not significant. Since this is an annual figure, the COVID-19 shock is not expected to last long. Therefore, it is assumed that oil demand will recover and prices will rise in the second half of the year.

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