The Bank of Korea: "COVID-19 is a factor lowering domestic growth rate... Impact greater than in the past"

December 12 Bank of Korea Monetary and Credit Policy Report
Impact of COVID-19 on Real Economy... Domestic Demand, Services, Goods, and Manufacturing Industries

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] An analysis has emerged that the novel coronavirus infection (COVID-19) crisis will act as a factor lowering this year's domestic growth rate. This diagnosis is based on the expected decrease in the number of foreign tourists and private domestic consumption.

According to the "March 2020 Monetary and Credit Policy Report" submitted by the Bank of Korea to the National Assembly on the 12th, the impact of this crisis is expected to be greater than in the past due to the spread of COVID-19 to other countries. This is because China plays a key role in the global division of labor as the world's largest trading and tourism exchange country.

COVID-19 is expected to affect the real economy through channels such as domestic demand, service trade, goods trade, and disruptions in manufacturing production.

The Bank of Korea stated, "Domestic consumption, centered on services such as culture and dining out, has significantly slowed due to the contraction of household economic activities," and added, "Corporate investment sentiment has weakened, which will negatively affect facility investment."

It is anticipated that COVID-19 will have a considerably negative impact on service exports, such as by shrinking travel demand from foreign tourists. Last year, Chinese tourists accounted for 34.4% of all foreign tourists.

It is also expected to affect private domestic consumption. Consumption in overall service sectors such as tourism, leisure, food, accommodation, and medical services is projected to be significantly sluggish. In particular, negative effects are being observed mainly in offline retail sales.

However, in the goods export sector, negative impacts are mainly seen in items with a high export ratio to China. Furthermore, if the spread of COVID-19 subsides, the operating rates of production facilities in China are expected to recover, gradually improving goods exports centered on exports to China.

Moreover, if the COVID-19 crisis prolongs, considerable disruptions are expected in both production and investment. The Bank of Korea stated, "Recently, COVID-19 has spread to Europe and other regions, and since negative impacts can be amplified through various transmission channels, it is necessary to closely monitor the development and ripple effects."

◆ Increased Volatility in Domestic Financial Market Price Variables... "Need to Monitor Carefully" = Regarding the domestic financial market, it was analyzed that the volatility of major price variables is expanding. Both stock prices and long-term market interest rates have sharply declined, and the degree of response is larger compared to past outbreaks such as Severe Acute Respiratory Syndrome (SARS), novel influenza (H1N1), and Middle East Respiratory Syndrome (MERS).

In terms of recovery speed, during past infectious disease outbreaks, except for long-term interest rates, levels were restored to previous levels within 13 trading days after the shock occurred. However, in the current COVID-19 spread, all long-term interest rates have remained significantly below previous levels even into March.

In the corporate bond market, credit spreads have only slightly widened, indicating no significant change in credit caution. Credit spreads for both high-grade and non-investment grade bonds increased by about 1 basis point on average, and robust investment demand supported net issuance in both categories.

The Bank of Korea diagnosed that domestic financial market price variables are reacting sensitively according to the progression of the infectious disease, with volatility greatly expanding. Therefore, it emphasized the need to monitor market conditions more carefully.

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