BOK "This Year's Growth Rate Could Fall to -1.8% in Worst Case"

Bank of Korea Economic Outlook

[Asia Economy Reporter Kim Eunbyeol] The Bank of Korea has projected that the annual economic growth rate for this year could fall to as low as -1.8% in the worst-case scenario. This forecast assumes that the number of confirmed COVID-19 cases peaks during the third quarter and that the easing of lockdown measures proceeds more slowly than expected.

Under the basic scenario, where COVID-19 cases peak in the second quarter, the growth rate is expected to be -0.2%. If the pandemic subsides more quickly than anticipated and countries ease restrictions rapidly, positive growth (0.5%) is also possible.

On the 28th, the Bank of Korea stated in its economic outlook that the annual growth rate for this year is expected to be -0.2%, with next year's growth rate projected at 3.1%. The Bank noted, "The domestic economy will contract significantly in the first half of the year due to the global spread of COVID-19, but private consumption and export declines are expected to gradually ease, leading to a moderate recovery." The growth rate for the first half of the year is estimated at -0.5%, and for the second half, 0.1%. This forecast assumes a scenario where localized outbreaks of COVID-19 may occur intermittently but no large-scale resurgence happens, and global new cases peak in the second quarter before gradually declining.

However, if the situation turns out to be more pessimistic than expected, the economic growth rate could fall to -1.8%. In the worst case, the growth rate could decline more sharply than the International Monetary Fund (IMF)'s forecast for Korea (-1.2%). Conversely, under an optimistic scenario, growth could increase by 0.5%.

Assuming the basic scenario, the Bank of Korea expects private consumption to decrease by 1.4% year-on-year this year, with construction investment (-2.2%) and merchandise exports (-2.1%) also declining. By expenditure component, the contribution of domestic demand is expected to fall from 1.4 percentage points last year to 0.7 percentage points, while the contribution of exports is projected to turn negative from 0.6 percentage points last year to -0.9 percentage points.

The Bank highlighted high uncertainty in the future growth path, citing prolonged COVID-19 impacts, renewed US-China trade tensions, and delayed semiconductor market recovery as downside risks. On the other hand, if COVID-19 is contained early and the Chinese economy normalizes rapidly, the economy could rebound.

This year, the global economic growth rate is assumed to be -3.4%, reflecting the progression of COVID-19 and recent major economies' conditions. World trade growth is expected to contract by -11.8%, and the average crude oil import price is assumed to be $38 per barrel.

Employment shocks are also anticipated. The Bank of Korea forecasts that the number of employed persons will increase by only 30,000 this year, down to one-tenth of last year's increase of 300,000. A Bank official said, "While the service sector is expected to recover in the second half, sluggish conditions in manufacturing and construction will act as constraints."

The low inflation trend is expected to continue. The Bank projects this year's consumer price inflation at 0.3%, with core inflation excluding food and energy at 0.4%. This is due to the combined effects of economic slowdown and falling international oil prices, which increase downward pressure on prices. The government's welfare policy stance, along with reductions in some indirect taxes and public utility charges, are also seen as factors suppressing inflation. However, next year, consumer price inflation is expected to rise to 1.1%, with core inflation at 0.9%.

The current account surplus, which was around $60 billion last year, is expected to decrease to $57 billion this year and $55 billion next year. The Bank explained, "Due to the contraction in world trade, exports will decline sharply, reducing the merchandise trade surplus. The service account will continue to run deficits in processing and business services, but the deficit in travel services will narrow due to a significant drop in overseas travel by residents."

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