[Asia Economy Reporter Changhwan Lee] The Korea Economic Research Institute (KERI) projected South Korea's economic growth rate for this year to be -2.3%. It analyzed that the country's economic growth rate will be negative for the first time since the 1998 International Monetary Fund (IMF) foreign exchange crisis.

In the 'KERI Economic Trends and Outlook: Q1 2020 Report' released on the 8th, KERI forecasted, "Due to the impact of the novel coronavirus infection (COVID-19), a severe economic recession at the level of an economic crisis is inevitable."

KERI predicted that it will be difficult to avoid a severe economic recession at the level of an economic crisis this year. Despite the government's efforts to overcome the COVID-19 shock, domestically, the deterioration of economic conditions and paralysis of production and consumption activities, and externally, the economic downturn trends in major countries such as the U.S. and China are insufficient to reverse the situation.

Whether the current crisis situation will lead to a long-term recession phase depends greatly on the end point of the COVID-19 situation, the extent of economic slowdown in major countries such as the U.S. and China, and the speed and effectiveness of government responses.

Private consumption, which has played a supporting role in the domestic sector, is expected to grow by -3.7%, suffering from serious stagnation for a considerable period. The main causes of the deterioration in private consumption were identified as the physical constraints on consumption activities, anxiety about the epidemic, and consumption sentiment hitting bottom amid a significant decline in nominal wage growth due to poor corporate performance.

Structural causes such as the burden of household debt principal and interest repayments and the decline in asset prices such as stocks and real estate are also expected to accelerate the decline in private consumption.

Facility investment, which has already been in negative growth, is projected to record -18.7% growth due to domestic recession and economic contraction in major export target countries such as the U.S. and China. Construction investment is expected to decrease by -13.5% due to construction delays and the government's real estate suppression policies.

Real exports, which have played a key role in economic recovery during past crises, are also analyzed to grow by -2.2%, making it difficult to avoid negative growth due to the decline in global trade volume caused by the simultaneous downturn in the global economy.

KERI pointed out that domestically, the risk factors for growth include the resurgence of COVID-19 infections, a sharp drop in asset prices such as stocks and real estate, and the possibility of mass unemployment due to worsening corporate performance. Externally, growth risks include a greater-than-expected decline in growth rates of major countries, limited increases in semiconductor prices, and weakening of the Global Value Chain (GVC).

The consumer price inflation rate is expected to record 0.3%, which is 0.1 percentage points (p) lower than the previous year. The low demand pressure due to the severe economic recession, poor service industry conditions, as well as structural causes such as household debt and aging population, are expected to exert downward pressure on inflation.

The current account balance is projected to be around $51 billion, down $9 billion from the previous year, as the surplus in the goods balance sharply decreases due to the global economic downturn, while the deficit trend in the service balance continues.

KERI pointed out that due to the COVID-19 shock, not only the Korean economy but also the global economy will inevitably face a severe economic contraction in the first half of the year.

Therefore, it emphasized that future economic policies should avoid depleting national finances all at once and instead prepare to reserve some fiscal capacity in anticipation of the possibility of entering a prolonged recession phase expected to materialize after the second half of the year.

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