Negative Growth Confirmed in Q1, Red Light Likely for Q2 as Well

Impact of Sharp Consumption Drop in Q1 Continues as Export Decline Effects Intensify in Q2
First Consecutive Negative Growth in Q2 in 17 Years Expected

[Asia Economy Reporter Jang Sehee] As the novel coronavirus disease (COVID-19) crisis prolongs, concerns are deepening that South Korea will record negative growth for two consecutive quarters, following the first quarter and continuing into the second quarter of this year. The last time South Korea experienced negative growth rates for two consecutive quarters was in the first and second quarters of 2003. Generally, when the gross domestic product (GDP) shows negative growth for two consecutive quarters, it is considered that the economy has entered a recession.

According to the Bank of Korea on the 13th, the Bank will announce the preliminary real GDP growth rate for the first quarter of this year on the 23rd. The negative growth in the first quarter was anticipated by both economic forecasting institutions and the government, as COVID-19 has impacted the three major indicators: exports, consumption, and investment.

A Bank of Korea official stated, "Negative growth in the first quarter is inevitable due to the impact on global financial markets and the contraction of domestic consumer sentiment," adding, "The issue is whether it will be -1% or -2%." A government official also said, "There are concerns about negative growth rates in various sectors," and "We are making every effort to prevent employment instability and corporate liquidity crises caused by the prolonged COVID-19 situation."

At an economic outlook briefing in February, the Bank of Korea noted, "If real economy indicators slow down in February and March, it cannot be ruled out that the growth rate will fall short of last year's first quarter (-0.4%)." In fact, the 'March 2020 Business Survey Index (BSI)' released by the Bank of Korea on the 31st of last month showed that the BSI for overall industrial business conditions dropped 11 points from the previous month to 54, the lowest since February 2009 during the global financial crisis. Additionally, the manufacturing sector, a core industry of the Korean economy, fell 9 points from the previous month to 56.

Other sectors such as shipbuilding and other transportation (84→66), clothing and fur (52→29), other machinery and equipment (68→52), and automobiles (56→41) also showed declining trends. The Consumer Confidence Index (CCSI) in the previous month also plunged 18.5 points from the prior month to 78.4, marking the largest drop since July 2008.

The problem lies in the second quarter. If an unemployment crisis materializes due to the prolonged COVID-19 situation, private consumption could sharply decline. Furthermore, as advanced countries face a second wave of COVID-19 impacts, import demand is expected to decrease, which will also affect exports. With COVID-19 spreading to the United States and Europe, these countries have imposed restrictions on going out, and major stores have closed. Due to the sales cliff in overseas markets, domestic export companies are expected to face production disruptions.

Oh Changseop, a researcher at Hyundai Motor Securities, said, "Negative growth in the first quarter due to COVID-19 is inevitable," and warned of the possibility of further declines, stating, "If employment indicators worsen further, private consumption will also be affected, potentially resulting in negative figures for the second quarter."

Lee Sangjae, an economist at Eugene Investment & Securities, expressed concerns about a recession caused by two consecutive quarters of negative growth. He said, "Due to the base effect from the fourth quarter of last year (1.3%), the decline in the first quarter of this year will be very large," adding, "While the first quarter showed negative growth due to decreased consumption, exports are expected to impact the second quarter." He continued, "Since exports take 2 to 3 months from contract to shipment, there is a time lag before they are reflected in the balance of payments," and predicted, "In the second quarter, the cliff in import demand from advanced countries will significantly drag down performance, causing considerable damage."

More overseas institutions are forecasting that the Korean economy will experience negative growth for two consecutive quarters. Fitch recently projected South Korea's growth rate at -0.2%, expecting -0.3% and -3.0% quarter-on-quarter for the first and second quarters, respectively. Credit Suisse also forecasted that the Korean economy would record -1.3% growth quarter-on-quarter in the first quarter and -0.2% growth in the second quarter.

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