Private Consumption Hit Hard by COVID-19... Even Bleaker Outlook for Q2

Government Consumption Up 0.9%... Steadily Increasing but
Private Goods and Services Consumption Sluggish
Sharp Decline Comparable to 1998 Financial Crisis

Export Impact Inevitable in Q2
If Growth Rate Turns Negative Consecutively
0% Growth This Year Also Difficult

[Asia Economy Reporters Eunbyeol Kim and Sehee Jang] South Korea received its worst economic report card since the global financial crisis in the first quarter, largely due to a decline in private consumption caused by the impact of the novel coronavirus disease (COVID-19). Although the government has been injecting funds to boost consumption, the negative effects from sluggish private consumption and investment were much greater. While the year-on-year growth rate remained positive, it is difficult to view this positively since the growth rate in the first quarter of last year was already negative. The outlook for the second quarter, when the global impact of COVID-19 intensifies, is bleak. It remains uncertain whether the annual growth rate will be positive this year.

◆ Consumption and Investment Slump... Government Consumption Increases but Effects Yet to be Seen = According to the preliminary GDP data for the first quarter released by the Bank of Korea on the 23rd, the decline in consumption is particularly notable. Both goods (passenger cars, clothing, etc.) and services (food and accommodation, entertainment and culture, etc.) decreased, causing private consumption to plummet to levels comparable to the 1998 Asian financial crisis. Government consumption, however, continued to rise steadily. Government consumption increased by 0.9% quarter-on-quarter and 7.1% year-on-year, mainly driven by expenditures on items such as mask purchases. Dongwon Lee, head of the National Income Division at the Bank of Korea, explained, "Since the first quarter of last year, the government consumption growth rates were 0.4%, 2.2%, 1.4%, and 2.5%, respectively, and this time it increased by an additional 0.9%." The government's contribution to growth remains high. While the private sector's contribution to final consumption expenditure in the first quarter was -2.4 percentage points, the government's contribution was 1.4 percentage points. The 1.3% increase in construction investment, mainly in civil engineering, compared to the previous quarter was also influenced by the government. This reflects the effect of the government's expanded budget allocation for social overhead capital (SOC).

By economic activity, both manufacturing and services shifted to a decline. Manufacturing decreased by 1.8% due to reductions in transportation equipment and primary metal products despite an increase in semiconductors. Services decreased by 2.0%, centered on wholesale and retail trade, accommodation and food services, transportation, culture, and other services.

The effect of the government's supplementary budget was not reflected in the first quarter growth rate. Yangsoo Park, director of the Economic Statistics Bureau at the Bank of Korea, stated, "The effect of the first supplementary budget will appear from the second quarter. Although it is difficult to definitively assess the fiscal multiplier effect, the distribution of local currency and gift certificates could result in a large fiscal multiplier." Regarding the 90 trillion won additional support plan announced by the Blue House the previous day, he said, "It needs to be examined by item." He added, "In the current situation, the government is expected to make every effort to contribute as much as possible. While it is difficult for the economy to rebound sharply in the short term, the government measures will help minimize the shock and strengthen resilience, and when the global situation improves, South Korea can also rebound."

◆ The Problem is the Second Quarter... Positive Growth Possible Only if Advanced Economies Recover = The problem is that from the second quarter, as the impact of COVID-19 spreads worldwide including the U.S. and Europe, a blow to exports, which form the backbone of our economy, is inevitable.

Although exports in the first quarter were favorable, centered on semiconductors, exports have already plummeted starting from April, the first month of the second quarter. According to the Korea Customs Service, exports from the 1st to the 20th of this month fell sharply by 26.9% year-on-year. The decline in imports is also a concerning factor. While a reduction in imports can lead to a positive net export, it can be interpreted as a decrease in intermediate goods imports due to a sharp drop in semiconductor facility investment and export sluggishness. Even if consumption recovers, the fact that employment has already deteriorated means this could negatively impact domestic demand again.

If negative growth continues into the second quarter following the first quarter, the possibility of positive growth this year becomes uncertain. Director Park said, "Mathematically, for 1% growth to be possible, the quarter-on-quarter growth rate must record 0.6-0.7% for three consecutive quarters starting from the second quarter." He also estimated, "If the negative growth continues through the second quarter, the level of economic activity in the fourth quarter must return to that of the fourth quarter of last year for zero percent growth to be possible."

Economic experts unanimously agree that negative growth this year is inevitable. Professor Seun Jeong of the Department of Economics at Chungnam National University said, "Consumption may recover from the third quarter, but exports are expected to remain weak. Since COVID-19 will persist in other countries, the impact on exports will likely be greater than on domestic demand from the second half of the year, and corporate investment is unlikely to recover even with government fiscal input." Economist Sangjae Lee of Eugene Investment & Securities predicted, "From the second quarter, the downturn in advanced economies and the full-scale implementation of movement restrictions (so-called lockdown) will deepen the negative growth, with the second quarter growth rate expected to be in the -1% range." He foresaw that with the worsening export impact, positive growth this year would be difficult.

Professor Donghyun Ahn of the Department of Economics at Seoul National University said the key is when the U.S. lifts its lockdown. The lifting of lockdowns is necessary for the recovery of exports to the U.S., which will also lead to increased Chinese exports to the U.S. and a subsequent recovery of South Korea's exports to China. However, even with the most optimistic view, he predicted that exports could recover from the third quarter, meaning that after half a year of negative growth, achieving positive growth this year will be difficult. Professor Ahn said, "The question is how much government spending can defend the economy, but since exports have been severely damaged, it will be insufficient to prevent negative growth in facility and construction investments."

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