[Q&A] Bank of Korea Expects Possible Upward Revision of This Year's Growth Rate to -1.3%

27th Bank of Korea '2020 Q3 Real GDP (Preliminary)' Press Briefing
"Likely to Act as a Risk Due to COVID-19 Resurgence in Europe and the US"

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] Park Yangsoo, Director of the Economic Statistics Bureau at the Bank of Korea, said on the 27th, "Since the economic growth rate for the third quarter was 1.9%, which is much higher than the initial forecast (mid-1%), it is correct to expect that the annual growth rate may be revised upward." Earlier, the Bank of Korea had lowered its economic growth forecast for this year by 1.1 percentage points from -0.2% to -1.3% in August.

At a press briefing on the '2020 Q3 Preliminary Real Gross Domestic Product (GDP)' held at the Bank of Korea in Seoul that morning, Director Park said, "However, the rapid spread of COVID-19 in Europe and the United States poses a risk."

He added, "To speak conservatively, the annual growth rate is likely to remain within that range."

The economic growth rate for the third quarter announced by the Bank of Korea that day recorded 1.9% quarter-on-quarter. This was due to a base effect as exports recovered compared to the second quarter (-3.2%).

Real Gross Domestic Income (GDI) increased by 2.5% due to improved terms of trade, surpassing the real GDP growth rate (1.9%). This was influenced by a larger decline in import prices such as natural gas and machinery equipment compared to export prices like semiconductors.

Below is a Q&A with Director Park.

▲ What is the significance of the third quarter economic growth rate? Does it correspond to a rebound due to the base effect, meeting consensus, or a positive rebound after hitting bottom?

= The 1.9% growth in the third quarter partly reflects the base effect from the second quarter (-3.2%). There were concerns about the third quarter growth rate due to strengthened social distancing measures caused by the resurgence of COVID-19 and adverse weather conditions such as the rainy season and typhoons. Nevertheless, the global trade recovery, especially in goods and exports, rapidly improved, resulting in 1.9% growth. Domestic experts predicted 1.4%, and foreign investment banks (IBs) predicted 1.3%, but the actual figure exceeded all these consensus estimates. The third quarter growth rate of 1.9% was higher than the potential growth rate. If this trend continues, it can be said that the second quarter was the bottom. The 1.9% growth in the third quarter is steep enough to be considered a V-shaped rebound. However, since it has not reached the level of the fourth quarter of last year, there is some hesitation in calling it a V-shaped rebound.

▲ Comparing the preliminary and provisional figures for this year, the growth rate has been revised upward by 0.1 percentage points each time. Some argue that the estimates are conservative. What is your view?

= There is no consistent pattern between preliminary and provisional figures. The preliminary figures estimate end-of-quarter data based on trends, so provisional figures can be revised either upward or downward. Although this year the provisional figures were revised upward compared to the preliminary figures by chance, this reflects an already improving economic trend, so it is difficult to link the revisions between preliminary and provisional figures directly to economic sentiment.

▲ How much negative impact did the resurgence of COVID-19 and strengthened social distancing measures have on the third quarter growth rate?

= When comparing the estimated growth assuming the pre-resurgence trend with the actual growth, there is a difference of about 0.5 to 0.7 percentage points. However, this includes not only the effect of the COVID-19 resurgence but also the impact of adverse weather conditions such as the rainy season and typhoons. Separating these, the GDP impact from reduced private consumption due to the COVID-19 resurgence is estimated at 0.4 to 0.5 percentage points, and about 0.1 to 0.2 percentage points are attributed to adverse weather conditions.

▲ Given the growth path up to the third quarter, what level of growth rate is needed in the fourth quarter to achieve the annual growth forecast of -1.3%? Is there a possibility that the annual growth rate will exceed the forecast?

= Arithmetically, if the fourth quarter growth rate is between 0.0% and 0.4% quarter-on-quarter, the annual growth rate of -1.3% can be achieved. Initially, it was expected that if growth rates in the third and fourth quarters were in the mid-1% range, the annual growth rate of -1.3% would be achievable. Since the third quarter growth rate was higher than that, there is a possibility that the annual growth rate will be revised upward from the existing forecast. However, recent COVID-19 resurgences in Europe and the United States remain risk factors.

▲ Why was construction investment in the third quarter weaker than in the second quarter?

= The worsening weather conditions in the third quarter delayed construction work. Increased rainy days cause disruptions in outdoor construction. Additionally, the government adjusted SOC investments, leading to a decline centered on civil engineering construction.

▲ Do you think the potential growth rate has fallen to the 1% range?

= It is true that the potential growth rate has been on a continuous downward trend. If the impact of COVID-19 continues for a long time, it will affect the potential growth rate through hysteresis effects such as reduced investment and weakened job-seeking efforts by workers. However, it is difficult to estimate the immediate impact on the potential growth rate, and we need to observe the trend until next year to assess changes.

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