BOK: "Without COVID-19, Q1 Growth Rate Would Be 0%... Supplementary Budget Effect Still Pending" (Comprehensive Report 2)

Bank of Korea Announces Q1 Growth Rate of -1.4%
Lowest in 11 Years and 3 Months Since Financial Crisis

Private Consumption and Service Sector Output Plummet to Asian Financial Crisis Levels
Q2 Outlook Bleak... Positive Growth This Year Also Uncertain

[Asia Economy Reporters Eunbyeol Kim and Sehee Jang] As the economic shock caused by the novel coronavirus infection (COVID-19) intensified, South Korea's economic growth rate fell to -1.4% in the first quarter of this year. This is the lowest growth rate in 11 years and 3 months since the fourth quarter of 2008 (-3.3%) during the global financial crisis.

The Bank of Korea announced on the 23rd that the preliminary statistics for the first quarter's real Gross Domestic Product (GDP) showed a quarter-on-quarter growth rate of -1.4%. The year-on-year growth rate for the first quarter was 1.3%, indicating positive growth, but this is also the lowest figure in 10 and a half years since the third quarter of 2009 (0.9%).

The significant impact was largely due to private consumption and service sector production suffering shocks comparable to those during the foreign exchange crisis. Private consumption in the first quarter decreased by 6.4% compared to the previous quarter. This decline is the largest since the first quarter of 1998 (-13.8%). Private consumption, which accounts for about half of GDP, usually does not fluctuate significantly on a quarterly basis. However, in the first quarter, private consumption pulled down the overall real GDP by 3.1 percentage points. Park Yang-su, Director of the Economic Statistics Bureau at the Bank of Korea, stated, "The growth contribution of the domestic demand sector sharply dropped from 1.4 percentage points in the previous quarter to -2.0 percentage points," adding, "Among domestic demand items, the growth contribution of final consumption expenditure turned negative, from 0.9 percentage points to -2.9 percentage points."

Looking at the contributions by economic agents, the private sector's contribution turned negative, falling from 0.4 percentage points in the previous quarter to -1.5 percentage points. Although the government increased its fiscal spending, raising the government sector's contribution, the private sector's contribution plummeted. Director Park analyzed, "It seems that COVID-19 lowered the private sector's growth contribution by about 2.0 percentage points." Initially, before the COVID-19 outbreak, the Bank of Korea had expected the first quarter growth rate to be 0%. However, due to the COVID-19 situation, private sector growth recorded -2.0 percentage points, which the government offset, ultimately raising the growth rate to -1.4%.

Park Yang-su, Director of the Economic Statistics Bureau, Bank of Korea

Except for consumption, other components performed relatively well amid the COVID-19 crisis. Exports decreased by 2.0%, which was a relatively smaller shock compared to private consumption. From the production side, the service sector shrank by 2.0% in the first quarter, marking the largest decline since the first quarter of 1998 (-6.2%) during the foreign exchange crisis. Manufacturing decreased by 1.8%, as declines in transportation equipment and primary metal products were offset by growth in the semiconductor sector.

Ultimately, while the government is injecting funds to boost consumption, the negative impact from sluggish private consumption and investment was much greater. Although the year-on-year growth rate remained positive, it is difficult to view this positively since the first quarter of last year had already recorded negative growth. The outlook for the second quarter, when the global impact of COVID-19 intensifies, is bleak. It is uncertain whether the annual growth rate for this year will be positive. Real Gross Domestic Income (GDI) in the first quarter decreased by 0.6% quarter-on-quarter. The decline was smaller than that of real GDP due to improved terms of trade.

◆ Consumption and Investment Slump... Government Consumption Increases but Effects Are Yet to Be Seen = According to the preliminary GDP figures for the first quarter released by the Bank of Korea on the 23rd, the decline in consumption was particularly notable. Both goods (such as passenger cars and clothing) and services (such as food and accommodation, entertainment and culture) decreased, causing private consumption to plummet as sharply as during the 1998 foreign exchange crisis. Government consumption, however, continued to rise. 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. Lee Dong-won, Head of the National Income General Team at the Bank of Korea, explained, "Since the first quarter of last year, the government consumption growth rates have steadily increased by 0.4%, 2.2%, 1.4%, and 2.5%, and this time it rose by an additional 0.9%."

The government's contribution to growth has also continued to increase. On a quarter-on-quarter basis, the contribution of private final consumption expenditure turned negative, dropping from 0.5% to -3.1%. On a year-on-year basis, the private contribution to final consumption expenditure in the first quarter was -2.4 percentage points, while the government contribution was 1.4 percentage points. Construction investment increased by 1.3% quarter-on-quarter, centered on civil engineering construction, influenced by the government. This reflects the effect of the government expanding the social overhead capital (SOC) budget.

By economic activity, both manufacturing and services turned to decline. Manufacturing decreased by 1.8%, as increases in semiconductors were offset by declines in transportation equipment and primary metal products. The service sector shrank by 2.0%, mainly in wholesale and retail trade, accommodation and food services, transportation, culture, and other services.

The effect of the government's supplementary budget (additional budget) was not reflected in the first quarter growth rate. Park Yang-su, Director of the Economic Statistics Bureau at the Bank of Korea, said, "The effect of the first supplementary budget will appear from the second quarter," adding, "Although it is difficult to definitively assess the fiscal multiplier effect, the distribution of local currency and gift certificates may result in a large fiscal multiplier." Regarding the 90 trillion won additional support plan announced by the Blue House the day before, he said, "It seems necessary to look at it item by item." He also expressed hope, saying, "In the current situation, the government is expected to make maximum efforts to contribute. While it is difficult for the economy to rebound sharply in the short term, the government measures will minimize shocks and strengthen resilience, and when the global situation improves, South Korea can also rebound."

◆ The Problem Is the Second Quarter... Positive Growth Possible Only When 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 foundation 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 sharply declined by 26.9% year-on-year. The decline in imports is also a concerning factor. While a reduction in imports can lead to positive net exports, 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 affect domestic demand again, which is problematic.

[Image source=Yonhap News]

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, from the second quarter, the quarter-on-quarter growth rate must record 0.6 to 0.7% for three consecutive quarters to achieve 1% growth." He also estimated, "If negative growth continues through the second quarter, the economic activity level in the fourth quarter must return to about the level of the fourth quarter of last year to achieve growth in the 0% range."

Economic experts unanimously agree that negative growth this year is inevitable. Professor Jung Se-eun of the Department of Economics at Chungnam National University said, "Consumption may recover from the third quarter, but exports seem unlikely to improve," adding, "Since COVID-19 will continue in other countries, the impact on exports will likely be greater than on domestic demand from the second half of the year, and even with government fiscal spending, corporate investment may not recover." Lee Sang-jae, an economist at Eugene Investment & Securities, predicted, "From the second quarter, the downturn in advanced countries and the full-scale implementation of movement restrictions (so-called lockdown) will deepen the negative growth, expecting the second quarter growth rate to also record the -1% range." He foresaw that with greater export shocks, positive growth this year will be difficult.

Professor Ahn Dong-hyun of Seoul National University’s Department of Economics 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., and as China’s exports to the U.S. increase, South Korea’s exports to China can also recover in a chain reaction. However, even with the most optimistic view, he predicted that exports could recover from the third quarter, meaning negative growth for half a year followed by positive growth this year would be difficult. Professor Ahn said, "The issue 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 investment and construction investment."

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