They Said the End of the COVID Tunnel Is in Sight... Domestic Demand and Exports Dark Again

Government Focuses Solely on Export Recovery... Car Exports and Exports to China Fall Short of Expectations
COVID-19 Spread Tightens Quarantine Measures... Domestic Demand Also Shrinks Significantly
Government Considers Economic Policy Shift... From Domestic Demand Expansion to Export Support

[Asia Economy Reporters Eunbyeol Kim, Sehee Jang, Sejong=Chaeseok Moon] The flicker of economic recovery that seemed to be reviving is fading. As the world unlocks the restrictions imposed due to the novel coronavirus infection (COVID-19), the pace of export recovery, which was expected to rebound, is slower than anticipated. At the same time, domestic demand, which had been sustained by thorough quarantine measures, is wavering due to the overlap of record-breaking monsoon rains and the resurgence of COVID-19. Earlier this month, the Bank of Korea announced a current account surplus for the first half of the year that exceeded expectations, diagnosing that "the tunnel of uncertainty is being left behind as exports improve." However, contrary to expectations, the rapid spread of COVID-19 makes it inevitable to revise downward the growth forecast that the Bank of Korea will announce on the 27th. In May, the Bank of Korea projected a worst-case scenario growth rate of -1.8% for this year, but it is now expected to be even lower. Some predict the growth forecast could fall into the -2.0% range.

They Said the Tunnel's End Was in Sight... August Exports Still Sluggish

On the 21st, the Korea Customs Service announced that exports until August 20th recorded a -7.0% decline. This is the same level as last month's export performance, making a negative export figure for August inevitable if the current trend continues. If this continues, the third quarter's Gross Domestic Product (GDP) is also expected to fall short of expectations. In our economy, exports account for 44% of GDP.

Government officials still claim that the export recovery trend is ongoing. A Ministry of Trade, Industry and Energy official said, "Thanks to the relatively stable performance of semiconductors, bio-health, and computer peripherals, the year-on-year decline in exports is gradually decreasing," adding, "Considering that exports were sluggish even before the COVID-19 outbreak, the third quarter's performance is not very bad."

However, looking at customs clearance data by item and export destination, it is difficult to say the recovery has been significant. Experts particularly express concern over the decline in automobile exports and the weaker-than-expected recovery of exports to China. Professor Insu Kang of the Department of Economics at Sookmyung Women's University explained, "It is disappointing that exports to China have remained flat, and there is a possibility that the U.S. may impose lockdown measures again," adding, "By industry, it is hard to find any sector other than semiconductors that can be expected to rebound significantly." The relatively slow pace of China's economic recovery, compared to the Chinese government's claims, is also a negative factor when considering exports to China.

Professor Namsuk Choi of the Department of Trade at Jeonbuk National University diagnosed, "Unless a fundamental momentum is secured, such as shifting the global production network to an Asia-Pacific regional network or activating an intra-East Asia production division of labor network, it will be difficult to expect a rebound in our exports."

COVID-19 Resurgence... Domestic Demand Shrinks Amid Tightened Quarantine

With the rapid resurgence of COVID-19 and the government strengthening social distancing measures, the domestic demand that had barely revived is expected to shrink again.

According to the Bank of Korea's 'July Consumer Sentiment Survey,' the Consumer Confidence Index (CCSI) rose for the third consecutive month to 84.2. The Business Survey Index (BSI) for all industries in July also recorded 60, up 4 points from the previous month. Domestic card approval amounts in July increased by 4.8% compared to a year earlier, showing a three-month consecutive increase. The government was expecting economic effects from the temporary holiday declared on the 17th. However, the number of confirmed cases began to rise just before the temporary holiday, and as social distancing levels increased in the metropolitan area, consumption has been shrinking. The record-breaking monsoon rains that started at the end of July had already raised concerns about domestic demand contraction as people reduced outings, and the second wave of COVID-19 has extinguished the spark of domestic demand recovery.

Government in Dilemma... Policy Direction Shifts

The government's concerns have deepened. Initially, the government pursued policies to expand domestic demand under the assumption that export recovery would be slow. However, now that quarantine has become the top priority, it has become difficult to push forward domestic demand stimulation policies again. Some criticize that premature consumption stimulation policies, such as issuing consumption coupons, caused the public to underestimate the COVID-19 situation. The government is suspending consumption coupon programs for lodging, travel, and other sectors that were implemented to stimulate consumption.

Kim Yong-beom, 1st Vice Minister of Strategy and Finance [Photo by Yonhap News]

Kim Yong-beom, the First Vice Minister of Strategy and Finance, also indicated a shift in economic policy direction on the same day. Vice Minister Kim emphasized, "When the spread of COVID-19 is as intense as now, we must tighten quarantine measures," adding, "To prevent mistakes, we must quickly adjust policy tools and directions without sticking to a single method in response to rapidly changing situations."

The government is turning back to the stance of "exports are the only reliable support." A senior government official said, "Since exports support our economy, we plan to do our best to improve exports." The government has decided to supply 4.5 trillion won in funds to key export-oriented service industries by 2023. The plan is to induce export expansion through six major industries: medical and healthcare, edutech, digital services, fintech, and engineering.

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