[Weekly Review] If COVID-19 Extends to Winter, -2.2% Growth... Economic and Quarantine Golden Time

From 12 AM on the 30th, Social Distancing in the Seoul Metropolitan Area Raised to Level 2.5

[Asia Economy Reporter Eunbyeol Kim] As concerns grow over the possibility of a nationwide outbreak of the novel coronavirus infection (COVID-19), worries about economic damage are also becoming increasingly serious. With the -1% growth rate for this year already considered a foregone conclusion, the government has decided to raise the 'social distancing' level in the metropolitan area from the current Level 2 to Level 2.5 starting at midnight on the 30th.

This is because if the intensity and scope of the social distancing measures are excessively large, the negative impact on the economy cannot be ignored. Even with the upgrade to Level 2.5, if the situation does not improve, the only remaining option will be Level 3. It is a critical juncture that will determine the spread or containment of COVID-19. Since self-employed individuals and small businesses have been enduring since last spring’s COVID-19 outbreak shock through loans and other means, the coming week is expected to be a 'golden time' for both quarantine and the economy.

Metropolitan Area Quarantine Level Raised to 2.5 Until Midnight on the 6th of Next Month... Measures to Minimize Economic Damage

The government decided to raise the quarantine level in the metropolitan area to Level 2.5, equivalent to Level 3, from midnight on the 30th until midnight on the 6th of next month. The core of this strengthened quarantine measure is to restrict the operation of multi-use facilities to minimize contact between people.

Under this measure, operations of restaurants and coffee shops, which mainly attract young people, will be restricted. Restaurants and bakeries in the metropolitan area can operate normally during the day and night, but from 9 p.m. to 5 a.m. the next day, only takeout and delivery are allowed. Franchise coffee shops such as Starbucks and Coffee Bean are prohibited from allowing food and beverage consumption inside the store regardless of business hours, and only takeout and delivery orders are permitted. However, small cafes run by individuals are not subject to this measure.

Indoor sports facilities such as gyms will be completely closed. To protect children and adolescents from infectious diseases, face-to-face classes at academies in the metropolitan area are also banned. Study rooms and study cafes have effectively been ordered to close. In addition, to reduce external contact for the elderly vulnerable to infectious diseases, visits to nursing hospitals and nursing facilities are prohibited. Facilities used by the elderly such as day and night care centers and cooling shelters are recommended to close.

On the 28th, citizens were coming and going during the evening hours in the area of Konkuk University Matgil Street, Gwangjin-gu, Seoul, where restaurants, pubs, and karaoke rooms are concentrated.
[Image source=Yonhap News]

The reason the government is implementing Level 2.5 instead of Level 3 first is due to concerns about economic damage caused by a contraction in private consumption. KB Securities analyzed that implementing Level 3 social distancing measures would reduce this year’s growth rate by 0.8 percentage points. If Level 3 distancing is implemented in the metropolitan area for two weeks, the growth rate would drop by 0.2 percentage points, and if it continues for a month, it would fall by 0.4 percentage points.

Bank of Korea Revises This Year’s Growth Forecast from -0.2% to -1.3%

On the 27th, the Bank of Korea sharply lowered its growth forecast for this year to -1.3%. This is a downward revision of more than 1 percentage point in three months since the May forecast of -0.2%. Compared to the February forecast (2.1%) before the COVID-19 outbreak, the forecast has dropped by more than 3 percentage points in six months. This marks the first time in 22 years since the foreign exchange crisis that the Korean economy has experienced negative growth.

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

Bank of Korea Governor Lee Ju-yeol stated, "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 of the forecast path is very high." He also assessed that "the global economic slowdown has somewhat decelerated due to the continued spread of COVID-19." The Bank of Korea forecast next year’s growth rate at 2.8%, and consumer price inflation rates for this year and next year at 0.4% and 1.0%, respectively.

The Bank of Korea released this year’s growth forecast based on three scenarios, noting that under a pessimistic scenario, the growth rate could fall as low as -2.2%. This assumes the spread of COVID-19 in Korea continues through winter. Kim Woong, head 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," adding, "Based on this, the baseline scenario assumes that the resurgence of COVID-19, which has continued since mid-August, will begin to subside from October." He further stated, "If the resurgence had not occurred, the growth forecast for this year would not have been revised down to the -1% range."

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 of Korea stated, "Due to the impact of the COVID-19 spread, domestic economic growth is expected to be sluggish," and "Inflationary pressure from the demand side is also expected to remain low, so the monetary policy easing stance will be maintained."

'Fair Economy 3 Laws' Approved at Cabinet Meeting

Meanwhile, the 'Fair Economy 3 Laws' bill, which includes the abolition of the Fair Trade Commission’s exclusive right to prosecute and the introduction of a multiple derivative lawsuit system, was approved at the Cabinet meeting on the 25th. Although there were concerns from the industrial sector that corporate activities might be restricted, the government passed the bill virtually as originally proposed.

Despite strong opposition from the business community regarding 'separate election of audit committee members' and 'strengthened regulation on unfair profit-seeking by large business groups,' the government finalized the bill without any amendments to the previously announced draft. The government plans to submit the Fair Economy 3 Laws bill containing these provisions to the National Assembly by the end of this month, aiming for passage during the regular session in September.

The amendment to the Fair Trade Act includes abolishing the exclusive right to prosecute, which stipulates that the prosecution cannot indict for hard-core collusion such as price-fixing, supply restrictions, and bid-rigging without a complaint from the Fair Trade Commission. The upper limit on fines for violations of the Fair Trade Act will also be doubled.

The amendment to the Commercial Act includes the introduction of a multiple derivative lawsuit system and separate election of audit committee members. If a subsidiary’s director neglects duties and causes damage to the subsidiary, shareholders of the parent company holding a certain percentage of shares (1% of total shares for unlisted companies, 0.01% for listed companies) will be able to file a derivative lawsuit against the subsidiary’s director.

With the enactment of the Financial Group Supervision Act, government supervision of non-holding company groups will be strengthened. According to the bill, six groups including Samsung, Hanwha, Mirae Asset, Kyobo, Hyundai Motor, and DB, whose affiliated financial companies operate two or more financial businesses and whose total assets exceed 5 trillion won, will be designated as financial groups. They will be required to manage capital adequacy, internal transactions, risk concentration, and other factors affecting soundness at the group level.

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