Q2 Growth Rate -3.3%... Heading Toward the Worst-Case Scenario (Comprehensive)

'2020 2nd Quarter GDP Preliminary Report'
Exports -16.6%, Lowest Since the 1970s...Private Consumption Turns Positive

[Image source=Yonhap News]

[Asia Economy Reporters Eunbyeol Kim and Sehee Jang] South Korea's economic growth rate in the second quarter fell by the largest margin since the foreign exchange crisis. The prolonged impact of the novel coronavirus disease (COVID-19) caused exports to perform worse than expected. As the export shock was greater than anticipated, a red light has been lit for the growth of the Korean economy.

On the 23rd, the Bank of Korea announced that the real gross domestic product (GDP, preliminary figure) for the second quarter was 447.4 trillion won, down 3.3% from the previous quarter. This is the lowest level since the first quarter of 1998 (-6.8%) during the International Monetary Fund (IMF) foreign exchange crisis.

Comparing to the financial crisis period, in the fourth quarter of 2008, the growth rate was -3.28% when rounded to the second decimal place, but in the second quarter of this year, it recorded a growth rate of -3.33%, which was worse than during the financial crisis.

The problem was exports, which recovered more slowly than expected. Exports, which recorded -1.4% in the first quarter, saw the decline widen to -16.6% in the second quarter. The slow recovery in the U.S. and Europe was the reason for the sluggish export recovery.

Private consumption turned positive from -6.5% in the first quarter to a growth rate of 1.4% in the second quarter. This was due to the effect of the government’s emergency disaster relief funds and the domestic slowdown in the spread of COVID-19, allowing the economy to recover normally. However, government consumption rose by only 1.0%, down 0.4 percentage points from 1.4% in the first quarter.

Both construction and facility investment also turned negative. Construction investment, which recorded 0.5% in the first quarter, turned to -1.3% in the second quarter, and facility investment fell from 0.2% to -2.9%. A Bank of Korea official stated, "In the case of construction investment, the decrease was centered on building construction, and facility investment showed a decline due to a reduction in transportation equipment, but investment in semiconductor manufacturing machinery increased."

◆ Consecutive negative growth in Q1 and Q2... Annual growth rate this year could fall to -2% = It is also a record that the growth rate was negative for two consecutive quarters. The last time the Korean economy showed negative growth for two consecutive quarters was in the first quarter (-0.7%) and second quarter (-0.2%) of 2003 during the credit card crisis. During the foreign exchange crisis in 1997-1998, there was negative growth for three consecutive quarters. Generally, when the growth rate is negative for two consecutive quarters, it is considered a recession. This confirms a recession through the growth rate indicator.

With the shock of consecutive negative growth in the second quarter, the annual growth rate this year is expected to fall below the Bank of Korea’s forecast (-0.2%).

Experts believe that exports in the second quarter declined more sharply than expected, resulting in a lower growth rate than anticipated. Professor Soyoung Kim of Seoul National University’s Department of Economics said, "There are no factors for improvement in corporate investment or domestic consumption other than exports," adding, "As long as COVID-19 is not completely eradicated, the sluggish economic situation will continue." Professor Ingyo Jung of Inha University’s Department of International Trade said, "With export routes to the U.S. and Europe blocked, it is unlikely that South Korea’s exports will improve enough to turn positive," and added, "In the worst case, this year’s growth rate could fall to -2%."

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