If COVID Resurgence Continues, Growth Rate Could Drop to -2%, 'Precarious'

Bank of Korea Forecast Reflects Current Conditions Only
Risk of Export Sharp Decline if Countries Reimpose Lockdowns Due to COVID Resurgence

Social Distancing Level 3 Upgrade Also a Variable
"Growth Rate Could Drop by 0.8%P if Enforced for a Month"

Additional Interest Rate Cuts Limited by Effective Lower Bound
Likely to Keep Rates Steady This Year to Save Rate Cut Options

[Asia Economy Reporters Eunbyeol Kim, Sehee Jang] The Bank of Korea significantly lowered its economic growth forecast for this year to -1.3% on the 27th, but the actual growth rate is likely to fall short of even this. The Bank of Korea's forecast assumes that the spread of the novel coronavirus infection (COVID-19) will subside from next year, but since there is no sign of COVID-19 being contained yet, the latent uncertainties are likely to materialize. The problem is that both exports and private consumption, which account for a large share of Korea's gross domestic product (GDP), are directly hit by COVID-19. If countries overseas reinstate lockdown measures, exports, which had been recovering, could sharply decline again. Another variable is the possibility that COVID-19 could spread rapidly domestically, leading to an upgrade of social distancing to level 3. The Bank of Korea did not include the possibility of raising social distancing from the current level 2 in this growth forecast scenario.

Worst Case Scenario: Growth Rate Unavoidably Falls to -2% Range... Level 3 Social Distancing Also a Variable

Domestic and international research institutions have already issued more pessimistic forecasts than the Bank of Korea. The Organisation for Economic Co-operation and Development (OECD) judged that if the second wave of COVID-19 prolongs, Korea's growth rate could plunge to -2.0%. The International Monetary Fund (IMF) forecast is even more pessimistic at -2.1%.

If social distancing is raised to level 3 due to the spread of COVID-19, the shock will inevitably be greater. Gatherings and events of more than 10 people will be banned, and businesses will be prohibited from operating after 9 p.m., causing face-to-face consumption to plummet. According to an analysis by KB Investment & Securities, if the social distancing upgrade is implemented nationwide for a month, this year's growth rate could fall by an additional 0.8 percentage points. KB Securities forecasted, "If level 3 social distancing is implemented in the metropolitan area for two weeks, the growth rate will drop by 0.2 percentage points, and if it continues for a month, it will fall by 0.4 percentage points." This means that depending on the region and duration of level 3 social distancing, the growth rate could fall to the -2% range.

Professor Inho Lee of Seoul National University’s Department of Economics predicted, "If the resurgence continues throughout this year, it is not impossible for the growth rate to fall below -2%." Hana Bank Financial Investment Researcher Miseon Lee also predicted, "Even if a strong rebound occurs in the fourth quarter, it seems difficult to record a growth rate in the mid -1% range at present."

Exports Are the Only Way Out... Overseas Also Unstable

When the Bank of Korea made its economic forecast in May, it divided the scenarios into optimistic, baseline, and pessimistic, forecasting growth rates accordingly. The pessimistic scenario forecast at that time was -1.8%, based on the assumption that COVID-19 would peak in the third quarter. As of August, already in the third quarter, the spread of COVID-19 is more severe than the May pessimistic scenario assumption, but the growth forecast (-1.3%) is higher. The Bank of Korea says the reason is the "recovery of exports due to the lifting of lockdown measures in various countries." A Bank of Korea official explained, "In May, major countries like the U.S. and Europe had their doors locked tight. Although COVID-19 continued to spread afterward, countries lifted lockdowns, and the economy seemed to be decoupling." Given Korea’s characteristic of having an export share exceeding 40%, the recovery of trade conditions due to the lifting of lockdowns had a significant impact.

However, concerns remain. Professor Ingyo Jung of Inha University’s Department of International Trade said, "The COVID-19 situation will worsen, and many countries may reimpose lockdowns, so demand is unlikely to revive significantly." He added, "At the beginning of the COVID-19 spread, semiconductor prices rose as digital device purchases increased, but recently even that has declined. There are no notably good items or industries, so I don’t understand on what basis exports are considered to have improved."

Base Interest Rate Likely to Remain Frozen Throughout the Year... Saving the Last Card

The base interest rate is likely to remain frozen throughout this year. Enough money has already been injected, and market liquidity has increased to an all-time high, so lowering interest rates further is not necessarily the best option. Professor Inho Lee said, "Lowering interest rates further does not seem likely to stimulate investment. Now, it seems the approach will be to inject money through purchasing government bonds already issued in the market."

Researcher Miseon Lee said, "At present, fiscal policy effects are much more direct," and warned of the effective lower bound burden if interest rates are lowered further. Researcher Gong Dongrak of Daishin Securities also said, "Traditional interest rate policy has been exhausted. Unless the U.S. lowers interest rates further, it will be difficult to use the interest rate card." He added, "Ultimately, unconventional measures will have to be actively used, such as injecting money to purchase securities."

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