Q2 Real Economy and Export Shock Materializes... Is Annual Positive Growth Possible?

"Must grow 0.6~0.7% for 3 consecutive quarters... 1% growth possible"

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] South Korea's economy recorded a growth rate of -1.4% in the first quarter of this year, marking the lowest point in 11 years and 3 months since the global financial crisis. However, concerns are rising that positive annual growth may be difficult as the impact of the novel coronavirus disease (COVID-19) continues through the remaining second, third, and fourth quarters.

According to the preliminary report on the real Gross Domestic Product (GDP) for the first quarter of 2020 released by the Bank of Korea on the 23rd, the real GDP in the first quarter decreased by 1.4% compared to the previous quarter. The significant drop was largely due to the freezing of private consumption caused by COVID-19.

The impact on private consumption and service sector production was comparable to that during the foreign exchange crisis. Private consumption in the first quarter fell by 6.4% quarter-on-quarter. This decline was the largest since the first quarter of 1998 (-13.8%). Private consumption, which accounts for about half of GDP, usually does not experience large quarterly fluctuations.

However, private consumption in the first quarter 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 at a briefing that "the contribution of domestic demand growth dropped sharply from 1.4 percentage points in the previous quarter to -2.0 percentage points," adding, "among domestic demand items, the contribution of final consumption expenditure growth turned negative from 0.9 percentage points to -2.9 percentage points."

With social distancing measures being fully implemented due to concerns over COVID-19 infection, consumption is expected to contract further from April onward.

The export outlook is also bleak. According to the Korea Customs Service, export value from the 1st to the 20th of this month was $21.729 billion, down 27% compared to the same period last year. While the average daily export decline in March was only 6.4% year-on-year, it dropped by 16.8% up to the 20th of April.

As the COVID-19 crisis prolongs, demand from advanced countries such as the United States and Europe is decreasing, leading to expectations that export performance will worsen further.

Cho Kyung-yeop, Head of Economic Research at the Korea Economic Research Institute, predicted, "From the second quarter, export-related industries and subcontractors may face a wave of bankruptcies," adding, "If a major employment crisis occurs, consumption will also shrink, making the overall economic situation difficult." He further said, "Growth rates in the third and fourth quarters are expected to fall below 0.5%, resulting in negative annual growth."

Meanwhile, Director Park commented on the possibility of positive annual growth, saying, "Mathematically, growth of 0.6 to 0.7% (quarter-on-quarter) must be sustained for three consecutive quarters starting from the second quarter for the annual growth rate to exceed 1%."

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