Bank of Korea to Revise Economic Outlook at Month-End... Will It Maintain 'Positive Growth This Year'?

US Q1 GDP Annualized -4.8%
Eurozone Q1 GDP -3.8%, Annual -14.4%

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eun-byeol] Due to the impact of the novel coronavirus infection (COVID-19), the U.S. economic growth rate in the first quarter recorded the worst performance since the 2008 financial crisis, and the Eurozone (19 countries using the euro) also showed the largest decline in economic growth rate in the first quarter, leading to expectations that South Korea's growth rate this year will also be affected. South Korea's first-quarter gross domestic product (GDP) growth rate was -1.4%, which was better than expected, but if the advanced economies such as the U.S. and Europe do not recover, it will be difficult to expect recovery not only in the first half but also in the second half of the year.

According to the Bank of Korea on the 1st, the Bank's Research Department plans to release a revised economic outlook on the 28th of this month and lower the annual economic growth forecast. Earlier, at the end of February, when the COVID-19 outbreak was in its early stages, the Bank of Korea had presented this year's growth forecast at 2.1%. This was a downward revision from the previous 2.3% to 2.1% reflecting the impact of COVID-19.

However, at that time, COVID-19 was mainly spreading in Asia, including China and South Korea, and the growth forecast was based on the assumption that suppressed consumption would rebound once the virus was contained. From March, COVID-19 spread worldwide, becoming a global pandemic, and as countries implemented lockdown measures restricting movement and closed borders, exports were disrupted. As an export-driven economy, South Korea is inevitably facing damage not only in the second quarter but also in the second half of the year due to the COVID-19 pandemic.

Therefore, it is inevitable that the Bank of Korea will lower the annual growth forecast in the revised economic outlook at the end of this month, but the degree to which it will be lowered is a matter of interest. On the 9th of last month, Bank of Korea Governor Lee Ju-yeol opened the possibility that South Korea's growth rate could fall to the 0% range this year but predicted it would not fall into negative territory. This means that if COVID-19 shows signs of subsiding and the economy rebounds, growth in the 0% range can be expected.

At that time, Governor Lee said, "Due to the global spread of COVID-19, future growth and inflation trends are expected to fall significantly below the previous forecast path," but also said, "The domestic economy is expected to grow positively this year."

Ultimately, since South Korea's situation can change significantly depending on when COVID-19 is controlled worldwide and the easing of lockdown measures in each country, it has become quite difficult for the Bank of Korea to forecast this year's growth rate.

[Image source=Yonhap News]

Global financial institutions also predict that South Korea is unlikely to avoid negative growth this year. The International Monetary Fund (IMF) revised South Korea's economic growth forecast for this year to -1.2%. This is a 3.4 percentage point drop from the January forecast of 2.2%. This is the first time since April 2009, right after the financial crisis, that the IMF has forecast negative growth for South Korea. However, this forecast assumes that COVID-19 will disappear in the second half of this year and that quarantine measures will be gradually lifted.

International credit rating agency Fitch also lowered South Korea's economic growth forecast for this year to -1.2%. Fitch revised down its February forecast of -0.2% by 1.0 percentage point within two months. Another credit rating agency, Standard & Poor's (S&P), also projected South Korea's economic growth rate this year at -1.5%.

There are also expectations that South Korea can barely maintain positive growth. Global investment bank JP Morgan projected South Korea's growth rate at 0.0% this year. JP Morgan evaluated, "Considering that COVID-19 has peaked, the contraction in South Korea's growth rate was noticeably lighter compared to other countries." Compared to China's first-quarter growth rate (-6.8%), South Korea succeeded in quarantine without implementing large-scale lockdown measures, resulting in relatively less economic damage.

The Hyundai Research Institute revised South Korea's growth forecast for this year from an initial 2.1% to 0.3%. The growth forecast for the first half of the year is -0.9%, and for the second half, 1.4%. The institute explained, "The downward revision reflects the contraction in economic activities due to the infectious disease, domestic demand recession, and global economic downturn. However, considering that policy authorities are implementing active economic stimulus measures, the overall Korean economy is not expected to record negative growth this year."

The institute stated, "The scale of economic stimulus measures should be increased so that economic agents can feel the effects, and preparations should be made for employment and export market contractions," adding, "In unprecedented crisis situations, monetary authorities need to apply existing laws and regulations flexibly, even if temporarily."

Meanwhile, the first-quarter damage to the global economy is increasingly reflected in numbers. The U.S. Department of Commerce announced that the first-quarter growth rate was -4.8% (annualized). This contraction is the first negative quarterly growth rate in six years since the first quarter of 2014 and the steepest decline since the fourth quarter of 2008 (-8.4%). Eurostat, the statistical office of the European Union (EU), also reported that the Eurozone's first-quarter gross domestic product (GDP) decreased by 3.8% compared to the previous quarter. When annualized, this decrease amounts to 14.4%.

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