[Q&A] Bank of Korea: "3rd and 4th Quarter GDP Must Rise 1.8~1.9% to Achieve Annual -1%"

Exports -16.6%... Lowest Since the 1970s
"Economic Downturn Accelerated Rapidly Due to COVID-19"

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] The Bank of Korea forecasted that the third and fourth quarters of this year need to grow consecutively by 1.8~1.9% (quarter-on-quarter) for the annual growth rate to reach -1% this year.

On the 23rd, Park Yang-su, Director of the Economic Statistics Bureau at the Bank of Korea, said at the briefing on the "2020 Q2 Real Gross Domestic Product (Preliminary)" that "arithmetically, the third and fourth quarters need to grow by 1.8~1.9% for the annual growth rate to achieve -1%." The economic growth rate for the second quarter of this year recorded -3.3% due to the impact of the novel coronavirus disease (COVID-19), marking the lowest level in 22 years since Q1 1998 (-6.8%).

Although the contribution of domestic demand turned positive, exports sharply declined. In particular, exports decreased by 16.6% quarter-on-quarter due to automobiles, coal, and petroleum products. This is the lowest level since the 1970s.

The following is a Q&A with Director Park.

▲There is a significant difference from the initially forecasted Q2 growth rate (-early to mid -2% range) by the Bank of Korea.

=When the provisional Q2 figures were announced last time, it was expected that Q2 would show growth in the low to mid 2% range, but the actual figure was -3.3%, which is considerably worse. This is mainly due to the COVID-19 situation not calming down as expected, and exports and private consumption performing worse than anticipated. Overseas demand for automobiles and smartphones sharply declined due to movement restrictions in major export countries. Processing trade also performed poorly, causing export results to fall significantly below initial forecasts. Although consumer sentiment is improving, social distancing continues to partially restrict consumption.

▲How much does the Q2 growth rate pull down the annual growth rate?

=Although Q2 was worse than expected, the growth trajectory will vary depending on future developments. If governments do not strengthen movement restrictions, it will help economic activities in Korea. Looking at China's Q2 growth rate, it rebounded sharply with 11.5% quarter-on-quarter and 3.2% year-on-year growth. The rebound in the growth rate of China, a major trading partner, will benefit exports to China.

▲Can the Korean economy officially be considered in a recession?

=In advanced countries, if GDP growth rates are negative for two consecutive quarters, it is technically expressed as economic contraction. This is called a recession. Korea differs from advanced countries in that it has a high potential growth rate. Usually, if the real growth rate is lower than the potential growth rate, it is considered a downturn phase; if higher, an upturn phase. According to estimates, the potential growth rate has fallen to the low to mid 2% range, making it similar to the potential growth rates of advanced countries. The National Statistical Committee has indicated the economic peak was in September 2017. Officially, it can be seen that Korea is in an economic contraction or downturn phase. The COVID-19 shock occurred, and the economic downturn has accelerated rapidly.

▲What is the growth trajectory for Q3 and Q4? Besides exports, what other factors might act as downside risks to the economy in the second half?

=Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, said this morning that policy efforts will be made to clearly enable the Korean economy to rebound from Q3 and Q4. The annual growth rate will depend on the progress of COVID-19 and any strengthening of lockdowns. Besides exports, government efforts will influence raising the growth rate.

▲How effective are the government's emergency disaster relief funds and the third supplementary budget?

=The total amount is just under 13 trillion won. As of June, about 85% has been spent, which amounts to roughly 11 trillion won. This has been partially reflected in private consumption. Some of it replaced essential spending, which is difficult to calculate precisely. However, it can be said that the effect was greater than if the funds had been given as cash. The third supplementary budget was enacted on July 3, so it did not affect Q3.

▲What growth rates must Q3 and Q4 achieve for the annual growth rate to reach -1%?

=For the annual growth rate to be -1%, the growth rates for Q3 and Q4 (quarter-on-quarter) must be 1.8~1.9%.

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