Bank of Korea's Warning: "Possibility of Jobless Economic Recovery Becoming a Reality"

BOK Issue Note - Assessment of Growth Imbalance After the COVID-19 Crisis by the Bank of Korea

[Asia Economy Reporter Kim Eunbyeol] The Bank of Korea has released an analysis suggesting that the shock from the novel coronavirus disease (COVID-19) has concentrated on industries with high employment inducement effects, raising the possibility of a "jobless economic recovery." Amid a widening gap between the real economy and the financial sector, it pointed out that if the vulnerable groups continue to struggle and unemployment rises while asset prices fall, the current shock could potentially spread to the financial sector as well.

On the 21st, the Bank of Korea stated in its "BOK Issue Note - Assessment of Growth Imbalances After the COVID-19 Crisis" that "this crisis could cause permanent shocks to emerging markets, face-to-face service industries, and vulnerable groups, so the recent growth imbalances may not be a temporary decoupling phenomenon but could persist for a considerable period."

Looking at the domestic situation, in most countries including the United States, sales and employment shocks have concentrated in face-to-face service industries vulnerable to the health crisis, ultimately causing significant damage to small business owners and small and medium-sized enterprises (SMEs). South Korea is no exception, with jobs in vulnerable employment sectors such as sales positions, temporary daily workers, and self-employed individuals sharply decreasing and recovery remaining slow. By company size, the production decline rate of SMEs in the second quarter (compared to the same period last year) was more than twice that of large corporations. While labor and business income for households in the 4th and 5th income quintiles (top 40%) decreased by 3.6-4.4% compared to the same period last year, income for households in the 1st quintile (bottom 20%) plummeted by 17.2%. In the third quarter, although income for high-income households recovered to the previous year's level, income for 1st quintile households remained in decline.

The Bank of Korea also identified the faster recovery speed of financial markets compared to the real economy, which widens the gap between the real and financial sectors, as one of the characteristics of "domestic growth imbalances" commonly observed in South Korea and other major countries after the COVID-19 outbreak.

Imbalances between advanced and emerging countries are also emerging. While advanced countries are promoting economic recovery through bold fiscal stimulus measures, most emerging countries are struggling due to poor health environments and limited fiscal capacity.

It is expected that such domestic and international growth imbalances will delay economic recovery. Growth imbalances increase dependence on specific economic sectors, restrict growth in underdeveloped sectors, and suppress private consumption and employment. Ultimately, this could potentially cause delayed economic recovery, economic polarization, and a decline in growth potential.

In particular, from an employment perspective, COVID-19 damage has concentrated in industries with high employment inducement effects such as face-to-face services, raising concerns that the speed of employment recovery will be slower than during past crises.

Park Changhyun, head of the Bank of Korea's Research Department's General Research Team, said, "Due to differentiated employment shocks, a 'jobless economic recovery' with slow employment recovery may become a reality," adding, "Even during past crises, employment sluggishness persisted for a considerable period after economic recovery." He also raised the possibility that consumption recovery could be constrained for a long time due to the significant damage suffered by low-income groups with high consumption propensity.

The Bank of Korea pointed out that if, amid a contraction in the real economy, funds continue to flow into asset markets, the gap between the real and financial sectors will widen, consumption will be constrained, and the resource allocation function to the production sector will weaken, ultimately delaying the recovery of the real economy.

Furthermore, Park advised, "Since economic recovery is expected to be slow for the time being, it is essential in the short term to focus policy efforts on sectors and groups vulnerable to the COVID-19 shock," and added, "In the medium to long term, it is necessary to strengthen social safety nets to ensure that the economic benefits arising from the transition to a digital economy are broadly shared across society."

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