Bank of Korea: "This is not a V-shaped rebound" ... Hong Nam-ki: "Entering the path of economic recovery"

Q3 Gross Domestic Product (GDP) Growth Rate Rebounds to 1.9%

[Asia Economy Reporters Eunbyeol Kim and Sehee Jang] The third-quarter economic growth rate rebounded more sharply than expected due to the base effect from the previous quarter’s worst performance.

In the second quarter, the global spread of the novel coronavirus disease (COVID-19) led countries to impose lockdown measures, and exports plummeted to historically low levels. Therefore, compared to the second quarter, the third quarter was relatively able to turn positive. With the third-quarter growth rate rising significantly, it is expected that maintaining a similar level in the fourth quarter will allow the annual growth forecast (-1.3%) to be achieved.

However, interpreting the third-quarter positive growth as a 'V-shaped rebound' is considered premature. The current situation still falls far short of last year’s growth trend line, and the resurgence of COVID-19 overseas and contraction in the service industry pose downside risks.

The Base Effect of Exports Was Large, but... "Not a V-Shaped Rebound"

According to the Bank of Korea’s announcement on the 27th of the '2020 Third Quarter Real Gross Domestic Product (GDP),' exports in the third quarter rebounded by 15.6% quarter-on-quarter, turning sharply positive. The second quarter’s growth rate plunged to -3.2%, largely due to exports declining by -16.1%, but the recovery in exports helped the growth rate rebound more than expected. Among exports, goods exports rebounded by as much as 18.2% compared to the previous quarter. While net export contribution dropped to -4.1 percentage points in the second quarter, it jumped to 3.7 percentage points in the third quarter.

The government expects trade conditions to ease and exports to improve in the fourth quarter as well. Although COVID-19 is resurging in the US and Europe, it is considered unlikely that lockdown measures will be imposed again as they were earlier this year. However, expecting a rapid pace of improvement is difficult.

Professor Inho Lee of Seoul National University’s Department of Economics said, "Except for China, there are hardly any places where proper trade can be conducted, and the US and Europe are not yet recovering," adding, "It will be difficult for South Korea to find growth momentum from overseas for the time being." The continuation of anti-China trends after the US presidential election, which may prolong the trade war, is also unwelcome news for exports.

The Bank of Korea also assessed that although the third-quarter growth rate increase exceeded expectations (1.3~1.4%), it is still far from the anticipated V-shaped rebound. According to estimates by the Bank of Korea’s Economic Statistics Bureau, which set the seasonally adjusted GDP for the first quarter of last year as 1, the GDP in the third quarter of this year remains around 1.001, similar to the first quarter of last year. This is still far below the pre-COVID-19 GDP growth trend line. Park Yang-su, head of the Bank of Korea’s Economic Statistics Bureau, explained, "A V-shaped rebound should be judged by whether it rises sharply compared to the growth trend line," adding, "There is still hesitation in calling it a V-shaped rebound." He further noted, "While goods exports have recovered to last year’s level, service exports are still in the negative. Looking at GDP by economic activity, manufacturing sharply declined in the second quarter but has largely recovered, whereas the service sector’s recovery remains very slow."

COVID-19 Resurgence and Monsoon Rain Lowered Growth Rate... Without Resurgence, Mid-2% Growth Was Possible

Private consumption, which rebounded by 1.5% in the second quarter due to the government’s emergency disaster relief funds and individual consumption tax cuts, contracted again due to the resurgence of COVID-19. Private consumption in the third quarter fell by 0.1% quarter-on-quarter, and as private consumption shrank, the contribution of total domestic demand to growth (-1.7 percentage points) turned sharply negative compared to 0.9 percentage points in the second quarter.

The Bank of Korea analyzed that social distancing measures due to the COVID-19 resurgence lowered the growth rate by about 0.4 to 0.5 percentage points. It judged that if the consumption recovery seen in the second quarter had continued without the resurgence, growth in the third quarter could have reached the mid-2% range. The monsoon season and record heavy rains are also estimated to have reduced the growth rate by about 0.1 to 0.2 percentage points.

The Bank of Korea’s annual growth forecast (-1.3%) is expected to be comfortably achievable. Reflecting the third-quarter growth rate, it is estimated that if the fourth quarter’s growth rate is between 0.0 and 0.4% quarter-on-quarter, an annual growth of -1.3% is possible. Park said, "There is hope that the annual growth rate could be revised upward from previous estimates, but the resurgence of COVID-19 in the US and Europe remains a risk factor."

Hong Nam-ki: "Entered Recovery Trajectory... At 94.7% of Pre-Crisis Level"

The government was greatly encouraged by the third-quarter growth rate exceeding expectations. Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki said at the 4th Innovation Growth Strategy Meeting that "Growth rebounded significantly, centered on exports, entering a recovery trajectory toward economic normalization," adding, "It raises expectations for overcoming the crisis."

On the same day, Hong also wrote on Facebook, "If the GDP of the fourth quarter of 2019, just before the crisis, is set at 100, we are currently at 97.4%, which is estimated to be the best level compared to major advanced countries such as the US at 95.9% and the UK at 90.9%."

The government plans to actively promote domestic demand revitalization packages such as resuming the distribution of consumption coupons, Korea Sale Festa, and Christmas market events to boost domestic demand recovery. It will also strengthen online export support so that export companies can actively utilize large overseas shopping events in October and November. However, there are concerns that if the government hastily pursues consumption stimulation policies again to raise the growth rate, it could lead to loosening of quarantine measures as happened in August.

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