BOK "If Assuming a Pessimistic COVID Scenario... Growth Rate -2.2%"

Bank of Korea August Economic Outlook

[Asia Economy Reporter Kim Eun-byeol] The Bank of Korea has significantly lowered its economic growth forecast for this year to -1.3%. It also warned that if the resurgence of the novel coronavirus infection (COVID-19) lasts longer than expected both domestically and internationally, a growth rate in the -2% range cannot be ruled out.

On the 27th, the Bank of Korea stated in its August economic outlook, "If COVID-19 resurges globally and gradually subsides only after the end of next year, and if the domestic resurgence continues through winter (pessimistic scenario), South Korea's gross domestic product (GDP) this year could decrease by 2.2% compared to the previous year."

The pessimistic scenario assumes that COVID-19 resurges not only domestically but worldwide, leading to continued restrictions on movement related to economic activities. Under such circumstances, the global economy would only recover to pre-COVID-19 levels by the year after next. If movement restrictions in the U.S. and Europe persist or lockdown measures are reinstated, it could directly hit South Korea's exports, making a downward revision of the growth rate inevitable.

However, this is based on a pessimistic scenario. The Bank of Korea's baseline scenario projects a growth rate of -1.3%, which is more than 1 percentage point lower than the May forecast (-0.2%). This assumes that the domestic COVID-19 spread continues for about two months before showing signs of stabilization, followed by only localized outbreaks.

A Bank of Korea official said, "The domestic economy is expected to gradually improve, but the pace will be slower than initially forecast. Although export sluggishness will gradually ease, the recent resurgence of COVID-19 infections is expected to constrain the recovery of private consumption." By sector, avoidance of face-to-face services and a contraction in overseas travel due to COVID-19 are expected to significantly restrict private consumption recovery for a considerable period. The Bank of Korea expects private consumption to shrink by 3.9% compared to the previous year.

Despite the downturn in the non-IT sector due to worsening business conditions, facility investment is expected to improve (+2.6%) in the IT sector, centered on the semiconductor industry. This is the result of IT companies actively investing in semiconductor facilities domestically. However, the spread of COVID-19 overseas and the resulting contraction in trade pose downside risks. Construction investment is expected to continue its adjustment trend due to sluggish private sector building construction.

Regarding merchandise exports (-4.5%), it is expected that the downturn will gradually ease after the second half of the year as major countries resume economic activities. However, since the spread of infectious diseases continues, the improvement trend is expected to be moderate. A Bank of Korea official said, "For customs-cleared exports, the IT sector is expected to remain sluggish due to delayed recovery in the semiconductor market and weakening global demand, affecting display panels and mobile phones. The non-IT sector is expected to suffer due to low oil prices and demand slowdown."

Due to the contraction in global trade, the merchandise trade surplus is expected to shrink significantly, leading to a decrease in the current account surplus compared to last year. Earlier, the Bank of Korea forecasted a current account surplus of $57 billion in May, but now projects a reduced figure of $54 billion.

Employment remains uncertain. Although the number of employed persons has decreased less sharply since May as the COVID-19 spread subsided, improvement in service sector employment is delayed, and the manufacturing and construction sectors remain sluggish, making it unlikely to avoid a decline in the near term. The Bank of Korea expects employment to decrease by 130,000 this year but increase by 200,000 next year.

Inflation is rising due to supply disruptions in agricultural products caused by concentrated heavy rains this summer. The Bank of Korea adjusted the consumer price inflation rate to 0.4% this year and 1.0% next year. A Bank of Korea official said, "Next year, consumer and core inflation rates are expected to be higher than this year as the impact of falling international oil prices disappears and the economy gradually improves, but the pace will be moderate."

Meanwhile, the Bank of Korea cited early development and supply of COVID-19 vaccines and treatments, expansion of China's economic growth, and government economic revitalization measures as upside risks to this year's growth rate. If COVID-19 vaccines are developed quickly and risks disappear, or if the government takes proactive measures, the growth rate may decline less than expected.

Downside risks include the resurgence of COVID-19 infections domestically and internationally, a slowdown in the semiconductor market, and intensified U.S.-China conflicts.

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