BOK "If COVID-19 Continues Until Winter, -2.2% Growth Rate" (Comprehensive)

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%, and 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, "Assuming that COVID-19 resurges worldwide and gradually subsides only after the end of next year, and that the domestic resurgence continues through winter (pessimistic scenario), South Korea's 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 globally, leading to continued movement restrictions 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 US 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, and the Bank of Korea presented a baseline scenario with a growth rate of -1.3%. This is more than 1 percentage point lower than the May forecast (-0.2%). It assumes that the domestic spread of COVID-19 continues for about two months before showing signs of easing, followed by only localized outbreaks. To achieve a -1.3% growth rate, the quarter-on-quarter growth rates in the third and fourth quarters need to average in the mid-1% range.

Kim Woong, Director of the Bank of Korea's Research Department, explained, "The period when the daily confirmed cases exceeded 100 during the early spread of COVID-19 lasted about 40 to 50 days. Considering this, the baseline scenario assumes that the resurgence of COVID-19, which has continued since mid-August, begins to subside from October." He added, "If the resurgence had not occurred, the growth forecast for this year would not have been lowered to the -1% range."

Economic Outlook Briefing held on the afternoon of the 27th at the Bank of Korea in Jung-gu, Seoul. From the left in the photo: Changho Choi, Head of Trend Analysis Team; Jiho Lee, Head of Research General Team; Hwansuk Lee, Deputy Governor; Woong Kim, Director of Research Bureau; Taesu Kang, Head of Price Research Team. Photo by [Photographer's Name]

Private Consumption Shrinks and Exports Expected to Recover More Slowly Than Anticipated

Looking at the details, private consumption was revised downward from -1.4% in the May forecast to -3.9%. Facility investment rose from 1.5% to 2.6%, while goods export forecasts were lowered from -2.1% to -4.5%. Construction investment was revised upward from -2.2% to -0.7%, but is still expected to remain negative.

The Bank of Korea stated in its economic outlook, "Domestic economy will gradually improve, but the pace is expected to be slower than initially forecast," and "Although export slumps 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 decline in overseas travel due to COVID-19 are expected to significantly restrict private consumption recovery for a considerable period.

Facility investment is expected to improve in the IT sector, centered on the semiconductor industry, despite weakness in the non-IT sector due to deteriorating business conditions. 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 goods exports, the Bank of Korea expects the slump to 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 gradual. A Bank of Korea official said, "For customs-cleared exports, the IT sector is expected to remain weak due to delayed semiconductor market recovery and slowing global demand affecting display panels and mobile phones," adding, "The non-IT sector is expected to suffer from low oil prices and demand slowdown."

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

Heavy Rain Also a Factor Pulling Down Growth Rate... Employment Still Uncertain

The prolonged rainy season and record heavy rains are also considered factors contributing to the downward revision of the growth rate. Lee Hwan-seok, Deputy Governor of the Bank of Korea, said, "Due to the rainy season, travel and leisure activities decreased, leading to a decline in both goods and services," adding, "This had the effect of lowering the third-quarter growth rate by 0.1 to 0.2 percentage points." The government's third supplementary budget was analyzed to have raised the annual GDP growth rate by 0.1 to 0.2 percentage points. The prolonged rainy season also played a role in raising prices, especially for agricultural products. The Bank of Korea adjusted this year's consumer price inflation to 0.4% and next year's to 1.0%. A Bank of Korea official said, "Next year, consumer price 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."

Employment remains uncertain. Although the number of employed persons has decreased less since May as the COVID-19 spread subsided, improvement in service sector employment is delayed, and the manufacturing and construction sectors remain sluggish, so a decline is expected to continue for the time being. The Bank of Korea forecasts a decrease of 130,000 employed persons this year and an increase of 200,000 next year.

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 fall less than expected.

Downside risks include the resurgence of COVID-19 infections domestically and internationally, semiconductor market slowdown, and intensification of US-China conflicts.

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