Economic Recovery in Korea Distant Amid Third Wave of COVID-19... Consumption Indicators Fall to August Levels

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eun-byeol] With the third wave of the novel coronavirus infection (COVID-19) leading to continued high-intensity social distancing measures and consumer sentiment shrinking, the Korean economy, centered on domestic demand, is once again faltering. In particular, small business owners and self-employed individuals are being pushed to the brink.

According to the government on the 20th, major consumption indicators have fallen to levels seen during the second wave in August. Especially as the spread of COVID-19 shows little sign of abating, if the social distancing level 2.5 period is prolonged or escalated to level 3, the domestic demand impact is expected to worsen significantly.

In the third quarter, Korea's Gross Domestic Product (GDP) increased by 2.1% quarter-on-quarter, and with social distancing dropping to level 1 in October, there was a strong possibility of a rapid recovery from the COVID-19 shock. However, the resurgence this winter has pushed hopes for economic recovery further away. The growth rate for the fourth quarter is expected to remain in the 0% range, if not turning negative (-).

The impact on domestic demand is particularly severe. Due to the spread of COVID-19 and social distancing effects, the year-on-year growth rate of domestic card approvals in November shrank to 3.8%, down from 5.2% in October, and department store and discount store sales have turned negative.

The most severely affected sector is small business owners and self-employed individuals primarily engaged in face-to-face service industries. With the implementation of social distancing level 2.5 in the Seoul metropolitan area, entertainment facilities, karaoke rooms, and indoor sports facilities have been completely closed, while restaurants, cafes, PC rooms, karaoke rooms, and marts face operational restrictions.

According to Korea Credit Data, the average sales of small business establishments nationwide during the second week of December (7th?13th) were only 71% of the previous year's level. In particular, sales in the Seoul area dropped to 62%. With reduced sales but fixed costs remaining unchanged, the survival of small business owners is under threat.

The burden of rent has especially emerged as a critical issue. The Korea Federation of Small and Medium Business proposed to the Democratic Party of Korea the need for rapid disbursement of the third disaster relief fund, direct rent support for small business owners, and tax reductions for landlords who lower rents. In response, President Moon Jae-in stated, "It is deeply painful to ask whether it is fair for businesses to bear the full burden of rent when their operations are restricted," and instructed the preparation of additional measures.

Following President Moon's remarks, the ruling party and government have begun preparing a 'package support plan' for small business owners. First, regarding rent, financial and tax support measures are being considered. Financial support for rent is a representative measure. The government is reportedly reviewing overseas cases.

There is a possibility that financial support for rent will be included in the third disaster relief fund. Using data from the second relief fund disbursement, it is possible to first provide the third relief fund, such as the Small Business New Hope Fund, which can be quickly paid, and then provide additional support for rent later. Tax support measures being discussed include expanding benefits for 'good landlords' who voluntarily reduce rent. Additionally, financial support such as extensions of payment deadlines for public utility charges, reductions in the burden of the four major social insurance premiums and taxes, and expanded loans are also under consideration. The reform of credit card fee burdens, originally planned for December next year, may be expedited.

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