Growth Rate Breaks '-1% Barrier'... BOK Lowers to -1.3% (Comprehensive Report 2)

Over 3 Months, Downward Adjustment of More Than 1%P
Base Interest Rate Held Steady at 0.50% per Year

[Asia Economy Reporters Eunbyeol Kim and Sehee Jang] The Bank of Korea sharply lowered its economic growth forecast for this year to -1.3% on the 27th. This marks a downward revision of more than 1 percentage point within three months since the growth forecast of -0.2% was presented in May. With the global spread of the novel coronavirus infection (COVID-19) still ongoing and signs of resurgence even domestically, the Bank had no choice but to lower its expectations. Compared to the February forecast (2.1%) before the COVID-19 outbreak, the projection has dropped by more than 3 percentage points in six months. This marks the first time in 22 years since the Asian financial crisis that the Korean economy is experiencing negative growth.

Since the Bank of Korea began compiling Gross Domestic Product (GDP) statistics in 1953, the Korean economy has contracted only twice: during the second oil shock in 1980 (-1.6%) and the Asian financial crisis in 1998 (-5.1%). Even in 2009, when the Bank forecasted a negative growth of -1.6% due to the financial crisis shock, the actual growth rate was positive at 0.8%.

Bank of Korea Governor Lee Ju-yeol stated on the day, "The domestic economic recovery trend will be slower than expected due to the impact of the COVID-19 resurgence," adding, "This year's growth rate is expected to be in the low -1% range, significantly below the May forecast, and the uncertainty surrounding the forecast path is very high." He also assessed that "the pace of global economic easing has somewhat slowed due to the continued spread of COVID-19." The Bank projected next year's growth rate at 2.8%, with consumer price inflation rates for this year and next year expected to be 0.4% and 1.0%, respectively.

Meanwhile, the Bank of Korea's Monetary Policy Committee decided to keep the base interest rate at a record low of 0.50% during its plenary session on the same day. The Bank stated, "Due to the impact of the COVID-19 spread, domestic economic growth is expected to remain sluggish."

On the morning of the 27th, Lee Ju-yeol, Governor of the Bank of Korea, presided over the Monetary Policy Committee meeting held at the Bank of Korea in Jung-gu, Seoul, and struck the gavel.

Although the Bank of Korea sharply lowered its forecast to -1.3%, the actual growth rate is likely to fall short of even this. The Bank's forecast reflects the current situation, but since COVID-19 shows no signs of being contained, the latent uncertainties are likely to materialize. Particularly problematic is that both exports and private consumption, which constitute a large portion of Korea's GDP, are directly hit by COVID-19. If countries worldwide reinstate lockdown measures, exports, which had been recovering, could sharply decline again. The rapid domestic spread of COVID-19, potentially escalating social distancing to level 3, is also a variable. The Bank 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 KB Investment & Securities analysis, if level 3 social distancing measures are implemented nationwide for one month, this year's growth rate could fall by an additional 0.8 percentage points. KB Securities projected, "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." Depending on the region and duration of level 3 social distancing, the growth rate could fall into the -2% range.

Professor Lee In-ho of Seoul National University's Department of Economics forecasted, "If the resurgence continues throughout this year, it is not impossible for the growth rate to fall below -2%." Hana Bank Financial Investment Researcher Lee Mi-sun 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."

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

When the Bank of Korea made its economic forecast in May, it divided scenarios into optimistic, baseline, and pessimistic, projecting growth rates accordingly. At that time, the pessimistic scenario forecast 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 assumption in the May pessimistic scenario, but the growth forecast (-1.3%) is higher. The Bank attributes this to "export recovery due to the lifting of lockdown measures in various countries." A Bank 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 exports accounting for over 40% of GDP, the recovery of trade conditions due to lifting lockdowns had a significant impact.

However, concerns remain. Professor Jung In-kyo of Inha University's Department of International Trade said, "The COVID-19 situation will worsen, and many countries may reinstate lockdowns, so demand is unlikely to recover significantly." He added, "During the early spread of COVID-19, semiconductor prices rose due to increased digital device purchases, 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 Unchanged Throughout the Year... Saving the Last Card

The base interest rate is likely to remain unchanged throughout this year. Since enough money has already been injected and market liquidity has increased to an all-time high, lowering interest rates further is not necessarily the best option. Professor Lee In-ho said, "Lowering interest rates further does not seem likely to stimulate investment. It seems the focus will shift to injecting money through purchasing government bonds already in the market."

Researcher Lee Mi-sun said, "At present, fiscal policy effects are much more direct," adding that lowering interest rates further would risk hitting the effective lower bound. Gong Dong-rak, a researcher at Daishin Securities, also said, "Traditional interest rate policy has been exhausted. Unless the U.S. lowers 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.