[Weekly Review] Confirming COVID-19 Manufacturing Shock... BOK Forecasts Negative Growth Rate

Base Interest Rate Further Cut from 0.75% to 0.50% Annually

[Asia Economy Reporter Kim Eun-byeol] The economy, worsened by the novel coronavirus infection (COVID-19), is being confirmed one after another through indicators. As COVID-19 spreads worldwide, including the US and Europe, it now appears to be adversely affecting not only domestic demand but also exports. The business conditions felt by manufacturers have recorded the lowest level since the financial crisis, and manufacturing operating rates have also plummeted. The Bank of Korea has lowered the base interest rate again, forecasting a negative growth rate for this year.

◆ COVID-19 Hits Korea's Core Manufacturing Industry = Last month, manufacturing production, operation, and shipment plunged to the worst level in 11 years and 4 months since the financial crisis. According to the April 2020 Industrial Activity Trends released by Statistics Korea on the 29th, manufacturing production decreased by 6.4% compared to the previous month. Production in the mining and manufacturing industries, including manufacturing, also fell by 6.0%. Both are the largest declines since December 2008.

In particular, production of semiconductors and automobiles, which are core industries of our economy, sharply declined. Semiconductor production decreased by 15.6% month-on-month due to a slowdown in the global economy and reduced production of memory semiconductors such as DRAM. This is the largest decline since 11 years and 4 months ago when it recorded -16.9%. Automobile production fell by 13.4% due to reduced factory operations caused by a contraction in overseas sales demand.

Service industry production increased by 0.5% compared to the previous month. This is due to the base effect of sectors such as accommodation and food services and education, which had sharply declined in March. The coincident index, which comprehensively shows the economy, fell by 1.3 points month-on-month. This is the lowest level in 22 years and 1 month since the foreign exchange crisis. Statistics Korea explained that the decrease in the number of employed persons affected this. The leading index fell by 0.5 points month-on-month due to decreases in economic sentiment index and the KOSPI.

Looking at the 'May Business Survey Index (BSI) and Economic Sentiment Index (ESI)' announced by the Bank of Korea on the 27th, the business sentiment of companies is in deep winter. The manufacturing business BSI for May was 49, down 3 points from the previous month. It has fallen for four consecutive months, reaching the lowest level since February 2009 (43). Medical supplies and pharmaceuticals (+23 points) rose, but automobiles (-11 points) and chemical substances and products (-10 points) declined.

The manufacturing business BSI fell regardless of company size or type, including large companies (-2 points), small and medium-sized enterprises (-4 points), export companies (-2 points), and domestic companies (-4 points). In particular, the business sentiment of small and medium manufacturing companies was worse than during the financial crisis. The index fell 4 points to 41, the lowest ever since related statistics began in 2003.

◆ Bank of Korea Lowers Base Interest Rate Again... Forecasts Negative Growth Rate = The Bank of Korea projected a negative growth rate (-0.2%) for this year in its revised economic outlook on the 28th. Until last month, the Bank of Korea expected positive growth this year but has now acknowledged that negative growth is inevitable. The Bank of Korea has forecast negative GDP growth only twice before: in April 2009 (-2.4%) and July 2009 (-1.6%), the year following the financial crisis. This is the first negative forecast in 11 years. The Bank of Korea expects the consumer price inflation rate this year to be 0.3%.

At the same time, the Monetary Policy Board held a meeting to decide the direction of monetary policy and lowered the base interest rate by 25 basis points (1bp = 0.01 percentage point) from 0.75% to 0.5% per annum. After lowering the base rate by 50bp from 1.25% to 0.75% in March and keeping it unchanged last month, it has now cut the rate again. Considering that non-reserve currency countries should maintain a higher base rate than the US (currently 0%), this effectively brings the rate close to zero.

Lee Ju-yeol, Governor of the Bank of Korea, said, "The domestic economy has significantly slowed down," adding, "Consumption remains sluggish, exports have sharply decreased, facility investment recovery is constrained, and construction investment adjustment continues." Compared to last month (when growth was judged to have significantly slowed and exports slightly decreased), the domestic economic situation is viewed as much more serious. He also said, "The employment situation has worsened, with a significant increase in the decrease of employed persons mainly in the service sector," and added, "The domestic economy is expected to continue a sluggish trend for the time being due to the spread of COVID-19." Governor Lee said, "This year's growth rate is expected to be around 0%, significantly below the February forecast (2.1%), and the uncertainty of the growth outlook path is judged to be very high."

Although the Bank of Korea presented a growth rate of -0.2% for this year, it forecast that it could fall as low as -1.8% in the worst-case scenario as COVID-19 worsens. This forecast assumes that the number of confirmed COVID-19 cases peaks in the third quarter and that the easing of lockdown measures is slower than expected. This is the first time the Bank of Korea has disclosed economic growth forecasts by scenario.

Meanwhile, the Bank of Korea's current economic outlook does not reflect the effects of the third supplementary budget (추경). Lee Hwan-seok, Deputy Governor of the Bank of Korea, said, "It is very difficult to calculate and reflect the supplementary budget in numbers when the timing of its passage through the National Assembly and execution is uncertain," adding, "Once the specific size of the supplementary budget is announced, we will be able to calculate how effective it is."

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