Over 100 Trillion Won Released but Domestic Demand Alone Insufficient... "Annual Growth Rate Could Drop to -2% in Worst Case"

Bank of Korea Q2 2020 Real GDP (Preliminary)

Domestic demand somewhat recovered
but growth pressured by sharp drop in external demand
Net exports contribution 0.7%P→-4.1%P
Facility and construction investment growth rates turn negative

[Asia Economy Reporters Kim Eunbyeol and Jang Sehee] Ultimately, the concerns have become reality. While domestic demand, which was severely impacted in the early stages of the novel coronavirus infection (COVID-19) spread, has somewhat recovered, exports have now become a stumbling block. Although the government has injected over 100 trillion won since COVID-19, it remains uncertain how much this will boost future growth rates. The funds provided to the private sector clearly increased consumption, but it is insufficient for the government’s money to counteract the effects on exports or corporate facility investments, which are influenced by external factors. Economic experts predict that this year’s annual growth rate could range from the late -0% range to the -1% range, and in the worst case, fall to -2%. In other words, the pessimistic forecasts from global institutions and investment banks (IBs) are proving accurate.

Domestic Demand Survived, but Exports and Investment Hold Back Growth

The main reason the second quarter GDP growth rate announced by the Bank of Korea on the 23rd recorded the worst performance since the foreign exchange crisis was exports. Domestic consumption gradually recovered, but the sharp decline in external demand significantly suppressed domestic growth, which is highly dependent on foreign trade. Exports account for about 25% of Korea’s GDP.

According to the Bank of Korea, the growth contribution of net exports in the second quarter was -4.1 percentage points, a sharp decline from 0.7 percentage points in the first quarter. The contribution from domestic demand turned positive, rising from -2.1 percentage points to 0.7 percentage points. Park Yang-su, Director of the Economic Statistics Bureau at the Bank of Korea, said, "Due to movement restrictions in major export destinations, overseas demand for automobiles and smartphones plummeted, and processing trade also suffered significantly due to shutdowns at overseas factories." Investment also turned negative. Director Park added, "Construction investment decreased by 1.3%, mainly in building construction, and facility investment fell by 2.9% due to a reduction in transportation equipment." Although domestic consumption improved, it was weaker than expected. Director Park explained the reason for the service sector’s underperformance by saying, "Consumer sentiment improved compared to April, but employment indicators remain poor, worsening household income conditions."

Where Did the Government’s 100 Trillion+ Won Go?

The government has injected over 100 trillion won since the COVID-19 outbreak. While this played a role in boosting private consumption and reducing the decline in growth rates, it is expected to be difficult to translate into investments. The 14 trillion won emergency disaster relief fund increased private consumption, but there is skepticism about whether it encouraged unplanned spending by citizens. Director Park said, "As of the end of June, about 85% (approximately 12 trillion won) of the emergency disaster relief fund had been spent, but only a portion was reflected in private consumption." However, the Bank of Korea believes the effect on consumption was greater than when the government provided cash support in the past, as the emergency relief fund had a set spending deadline and usage was limited.

From the expenditure perspective, the government’s contribution to growth turned negative at -0.3 percentage points. This is also related to the government’s money injection. The government reduced direct spending to prepare supplementary budgets, which lowered its contribution to GDP. Emergency disaster relief funds and other supplementary budget expenditures are considered transfer payments and are not counted in GDP.

Both Q3 and Q4 Need 3% Growth for Annual -0.2%

Achieving the 2020 growth rate forecast of -0.2% made by the Bank of Korea in May has become impossible. To reach -0.2%, the economy would need to grow about 3% quarter-on-quarter in both the third and fourth quarters, which is unlikely under current conditions. If the economy rebounds with growth rates of about 1.8-1.9% in Q3 and Q4, an annual growth rate of -1% is possible. Director Park said, "The future economic trajectory will depend on the progress of COVID-19 and the efforts of each country," adding, "Apart from exports, the extent of government efforts will also influence the outcome."

▲Park Yang-su, Director of the Economic Statistics Bureau at the Bank of Korea, is answering reporters' questions using a graph at the briefing on the preliminary real Gross Domestic Product for the 2nd quarter of 2020, held on the morning of the 23rd at the Bank of Korea in Jung-gu, Seoul.

However, experts agree that optimistic forecasts are difficult. It is impossible to artificially restore exports affected by external factors, and this can only happen if the global COVID-19 spread is contained. Professor Jeong In-gyo of Inha University’s Department of International Trade said, "The possibility of improvement going forward is almost none," adding, "While the economies of the US and Europe may recover to some extent, it will not be enough to make our exports positive." He continued, "Korea’s export share to China is about 25%, sometimes up to 27%, while the US is about 15% and Europe around 10%, which combined is similar to exports to China." He said, "Even if China’s economy experiences a V-shaped rebound, if the US and Europe do not improve, our economy will struggle to recover." He predicted, "The third quarter could be worse than the second, and this year’s growth rate could fall to -1%, or in the worst case, -2%."

Professor Kim Ki-heung, Emeritus Professor of Economics at Kyonggi University, emphasized the importance of where the money injected in the first half flows. Professor Kim said, "The recent earnings surprises by some semiconductor and bio companies are more due to private sector pre-investments rather than government spending," adding, "From the second half onward, it depends on where liquidity flows."

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