Rising Risk of Economic Downturn Due to COVID-19... Credit Rating Agencies Forecast Negative Growth

Hong Nam-ki "Cannot Rule Out Negative Growth in Q1"
Economist "33% Chance of Korea Entering Recession Within a Year"

[Image source=Yonhap News]

[Asia Economy Reporter Kim Bo-kyung] There is a growing expectation that the South Korean economy will fall into a recession due to the impact of the novel coronavirus infection (COVID-19). As international credit rating agencies and others have consecutively predicted negative growth for South Korea, the possibility of entering a recession has increased significantly.

Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki has already acknowledged the possibility of negative growth in the first quarter of this year.

At a press conference with foreign journalists on the 20th, Deputy Prime Minister Hong forecasted the economic growth rate for the first quarter of this year, stating, "Considering the impact of the COVID-19 situation, negative growth cannot be ruled out." He added, "When examining the ripple effects on domestic and international consumption, investment, and exports due to COVID-19, it is difficult to exclude such a scenario."

Last year's fourth-quarter growth rate was 1.2%, exceeding expectations, but with the first confirmed COVID-19 case in South Korea appearing on January 20, the first quarter took a direct hit from the virus.

The weighted average growth rate for the first quarter of this year compared to the previous quarter, as forecasted by 14 economic analysis institutions and investment banks (IBs), was -0.9%. Nomura Securities gave the most pessimistic forecast at -3.7%, followed by Oxford Economics (-1.4%) and Barclays (-1.3%).

HSBC, which predicted growth compared to the previous quarter even in the first quarter, forecasted a growth rate of only 0.3%. Soci?t? G?n?rale expected 0.1% growth.

A recession refers to a phenomenon where economic activities such as production, consumption, and investment contract, and the economic scale shrinks. Typically, a technical recession is defined as a real GDP decline for two consecutive quarters compared to the previous quarter.

The growth rate for the second quarter of this year is also not very optimistic. The UK-based information provider IHS predicted that South Korea's GDP will decrease by 0.9% in the first quarter compared to the previous quarter and will shrink by 0.7% in the second quarter as well.

The economic downturn for self-employed individuals continues as external uncertainties and rising oil prices combine as negative factors. On the 4th, a store in the underground shopping center near Gangnam Station in Seoul hung a notice announcing its closure and operated on its last day. Photo by Hyunmin Kim kimhyun81@

International credit rating agency Fitch recently stated, "The South Korean economy will enter a technical recession in the first half of the year and then rebound in the second half," forecasting negative growth of -0.6% and -0.9% in the first and second quarters respectively, followed by growth of 0.9% and 0.8% in the third and fourth quarters.

South Korea has never recorded two consecutive quarters of negative GDP growth compared to the previous quarter since the first and second quarters of 2003 (respectively -0.7% and -0.2%). If there is negative growth for two consecutive quarters, South Korea's annual growth rate is bound to falter.

Meanwhile, economists estimate that the probability of South Korea entering a recession within one year is 33%.

According to a survey conducted by Bloomberg on the 22nd targeting economists from economic analysis institutions and IBs, the probability of South Korea falling into a recession within the next 12 months was calculated at 33%. This probability was only 18% as of January this year, when the impact of COVID-19 was difficult to predict.

However, it sharply increased to 20% in February and 33% in March.

The most pessimistic forecast came from Scotiabank, which predicted a 50% chance of South Korea entering a recession within one year. The most optimistic forecast was from Soci?t? G?n?rale, which estimated the recession probability at 20%.

Lee Hwan-seok, Director of the Research Department at the Bank of Korea, stated, "With the real economy significantly slowing down in February and March, it cannot be ruled out that the first-quarter growth rate may fall short of last year's first quarter (-0.4%), which recorded negative growth."

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