"South Korea's Economic Growth Rate to Contract by More Than -5.5% if COVID-19 Prolongs"

'Analysis of the Economic Impact of COVID-19: Review of the Second Wave' Report

[Asia Economy Reporter Dongwoo Lee] A warning has been issued that if the novel coronavirus infection (COVID-19) persists for a long time, South Korea's economic growth rate this year could experience a recession worse than the foreign exchange crisis. There is an urgent need for the government to establish specific national strategies and economic revitalization measures.

On the 17th, the Korea Economic Research Institute announced in its report "Analysis of the Economic Impact of COVID-19: Review of the Second Wave" that if the number of infections in July and August is maintained in the third quarter of this year (Scenario 1), the economic growth rate is expected to be -2.3%. If infections increase by 25% compared to the past two months (Scenario 2), it is expected to reach -5.5%.

The report analyzed that if COVID-19 persists for a long time, permanent shocks such as capital accumulation and productivity decline will increase, resulting not only in a short-term decrease in growth rate but also in a change in the growth trajectory of the Korean economy itself.

Cho Kyung-yeop, head of the Economic Research Office, said, "If COVID-19 infections spread, an economic recession worse than the foreign exchange crisis, which recorded a -5.1% growth rate, could occur."

In Scenario 1, this year's economic growth rates were projected as follows: Europe (-10.5%), the United States (-6.2%), Japan (-4.4%), Asia (-0.9%), and China (1.5%). The report noted that considering the U.S. growth rate during the global financial crisis (-2.5%) and the Great Depression (-12.9%), the impact of COVID-19 could be fatal to the global economy as well.

The Korea Economic Research Institute explained that if the shock from COVID-19 is not severe, even if there is a loss in Gross Domestic Product (GDP), the long-term growth path could recover to the pre-shock trajectory, maintaining previous growth rates and income level trends. However, if the shock is large, a 'scale effect' causing long-term income reduction or a 'growth effect' where human capital accumulation and productivity decline lead to a downward shift in the growth path itself may occur.

The scale effect, estimated to approach the long-term growth path three years after the outbreak of COVID-19, was analyzed as the average GDP loss over 3 to 10 years following the outbreak. As a result, South Korea is expected to incur losses of $16.8 billion to $23.5 billion, the U.S. $106.8 billion to $137.5 billion, Japan $35.5 billion to $50.2 billion, China $189.7 billion to $268.9 billion, Europe $279.6 billion to $378.1 billion, and Asia $109.2 billion to $152.0 billion.

Cho emphasized, "We must be cautious not only about short-term economic losses but also about the downward shift in long-term GDP levels and the changing slope of the growth trajectory."

The report presented changes in major economic indicators such as global trade and unemployment rates. South Korea's exports are expected to decrease by 7.2% to 9.2%, and trade volume by 5.1% to 6.5%. In particular, the unemployment rate, which indicates job shocks, is estimated to increase by 0.68 to 0.91 percentage points compared to the baseline of 3.5% in 2020.

Cho Kyung-yeop, head of the Economic Research Office, said, "In the post-COVID era, to reflect industrial changes such as the activation of non-face-to-face industries and the digitalization of existing manufacturing, improving the domestic investment environment through institutional reforms such as regulatory reform, labor reform, and corporate tax reduction is the best way to overcome the current crisis and prevent long-term low growth."

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