KDI "If COVID-19 Is Not Controlled Within This Year, South Korea's Economic Growth Rate Will Be -1.6%"

[Sejong=Asia Economy Reporter Joo Sang-don] The Korea Development Institute (KDI) forecasted that the Korean economy would record a slight positive growth this year, assuming that the spread of the novel coronavirus infection (COVID-19) slows down from the first half domestically and from the second half globally, leading to a gradual recovery in economic activities. However, if the impact of COVID-19 prolongs beyond this, it is expected that Korea's economic growth rate will inevitably turn negative. The global containment of COVID-19 is thus a key variable for Korea's economic growth rate.

On the 20th, KDI released an economic outlook (first half of 2020) containing these details.

Considering the significant uncertainty regarding the scope and duration of COVID-19's spread, KDI announced economic growth rate projections for Korea under three different scenarios.

First, under the baseline scenario where the spread of COVID-19 slows down domestically from the first half and globally from the second half, leading to a gradual recovery in economic activities, Korea's economy is expected to grow by 0.2%. The growth rate for the first half of this year is projected at -0.2%, but it is expected to record 0.5% in the second half, resulting in an overall positive growth. The economic growth rate for next year is projected at 3.9%.

In the 'upside scenario,' where the spread of COVID-19 rapidly slows worldwide and economic activities mostly return to pre-crisis levels next year, the economic growth rate this year is expected to reach 1.1%.

However, in the 'downside scenario,' where economic activities gradually recover from next year due to the prolonged impact of COVID-19, the economic growth rate is feared to decline to -1.6%. This is based on the expectation that the growth rate will fall further from -0.7% in the first half to -2.5% in the second half of this year.

KDI outlined the worst-case scenario as follows: ▲ COVID-19 spreads again both domestically and internationally, maintaining a high number of cases, and economic activities are significantly restricted until the end of this year due to economic sentiment deterioration caused by infection risks ▲ economic policies responding to COVID-19 do not function smoothly, causing liquidity shortages in some vulnerable countries and industries, leading to a sharp contraction in global consumption and investment ▲ frequent production disruptions due to global supply chain disturbances ▲ and most cross-border human movements remain restricted next year.

In this case, both domestic demand and exports are expected to remain sluggish, causing Korea's gross domestic product (GDP) to fall significantly below the existing trajectory even in 2021. Specifically, due to ongoing economic uncertainty and income reduction, consumption is expected to remain weak next year, and recovery of domestic consumption by foreigners and overseas consumption by Koreans will be delayed due to entry restrictions. Exports are expected to sharply contract due to global investment sluggishness and supply chain disruptions, with only gradual recovery next year. Additionally, some vulnerable companies and households may go bankrupt, and large-scale unemployment may occur, resulting in a very slow economic recovery even after COVID-19 ends. The financial market's efficient resource allocation function is expected to deteriorate, and restrictions on international exchanges and technological innovation will cause a decline in overall economic productivity, leading to a downward revision of the medium- to long-term GDP trajectory.

Jodeok-sang, a KDI research fellow, said, "In response to the COVID-19 crisis, short-term priorities should be to prevent the spread of COVID-19 while simultaneously implementing policies to mitigate economic shocks and support economic recovery." He added, "At the same time, it is necessary to prevent temporary policies implemented to overcome the crisis after COVID-19 ends from causing inefficiencies in production and resource allocation."

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