'-1%' COVID-19 Economic Report Card... Corporate Investment and Exports Drive Growth

Bank of Korea '2020 Q4 and Annual GDP'

Exports including semiconductors recovered as lockdowns eased in the second half, but private consumption shock remains... Significant impact on retail, accommodation, and food services sectors

[Asia Economy Reporters Eunbyeol Kim and Sehee Jang] Despite the shock of the novel coronavirus disease (COVID-19), last year's economic growth rate managed to hold up at -1.0%, largely thanks to the "power of exports." In early last year, as countries imposed lockdown measures amid the initial spread of COVID-19, trade conditions worsened, but exports dramatically rebounded from the second half of the year as lockdowns were lifted. Above all, the recovery in external demand for key items such as semiconductors and automobiles had a significant impact.

Ultimately Exports... Corporate Facility Investment Also Turns Positive

According to the ‘2020 Q4 and Annual Real Gross Domestic Product (GDP)’ report released by the Bank of Korea on the 26th, exports showed signs of recovery as the year progressed into the second half. Although exports declined by 2.5% on an annual basis last year, exports in the third quarter increased by 16.0% compared to the previous quarter, and exports in the fourth quarter rose by 5.2%, maintaining a strong performance.

When compared to the same period last year, the export recovery trend continued. Goods exports in the second quarter of last year, when the spread of COVID-19 was at its peak, fell by 11.5% year-on-year, but the decline narrowed to 0.3% year-on-year in the third quarter, and turned positive at 3.7% year-on-year in the fourth quarter. On an annual basis, goods exports decreased by 0.5% year-on-year, but exports held up well in the second half, gradually reducing the decline. Park Yang-su, Director of the Economic Statistics Bureau at the Bank of Korea, stated, "The current account surplus reached $64 billion by November last year, close to the annual forecast of $65 billion," adding, "This is a factor that increases GDP from the perspective of net exports." The contribution of net exports to growth was 0.4 percentage points.

Another factor that boosted the growth rate was the concentration of corporate facility investment last year. Particularly, investment in manufacturing equipment such as semiconductors and displays increased significantly. Facility investment had been contracting with -2.3% in 2018 and -7.5% in 2019, but rebounded by 6.8% last year. Although facility investment showed signs of adjustment in 2018-2019, ironically, with the semiconductor market recovering during the COVID-19 period, companies proactively made facility investments.

The government also injected as much money as possible toward the end of last year to reduce the contraction. Construction investment in the fourth quarter increased by 6.5% compared to the previous quarter. Construction investment was negative in the second (-1.5%) and third (-7.3%) quarters but turned positive in the fourth quarter. Therefore, the contribution of construction investment to the growth rate also turned positive at 0.9 percentage points in the fourth quarter. Director Park said, "Both private and government construction investments increased, boosting construction investment, and the contribution of domestic demand to growth also narrowed its negative margin from -1.4 percentage points in the third quarter to -0.3 percentage points." Construction investment, which grew up to 7.3% in 2017, had contracted in 2018 and 2019.

Private Consumption Shock Continues

The problem is that the spread of COVID-19 continues, and the shock to private consumption persists. Last year, private consumption growth rates showed a pattern of -6.5% in Q1, 1.5% in Q2, 0.0% in Q3, and -1.7% in Q4. In the early stages of the COVID-19 outbreak, concerns were high as people refrained from going out and meeting others, causing a significant shock to private consumption in Q1. In Q2, private consumption seemed to revive briefly due to government emergency disaster relief payments, but it remained flat in Q3. In Q4, consumption of both services (food and accommodation, transportation, etc.) and goods (food and beverages, etc.) declined, decreasing by 1.7% compared to the previous quarter.

The domestic demand shock caused by COVID-19 is also evident when looking at GDP by economic activity. Among service industries, the retail, accommodation, and food service sectors were hit hard. GDP for retail, accommodation, and food services in Q4 fell by 0.3% quarter-on-quarter and by 7.4% year-on-year. Transportation GDP plummeted by 2.3% quarter-on-quarter and 18.3% year-on-year. This contrasts with manufacturing, which grew by 2.8% in Q4, buoyed by the boom in chemical products and computer, electronic, and optical equipment. Considering the scale of private consumption, it appears that it will take time to recover to pre-COVID-19 levels. According to the Bank of Korea’s analysis, if the private consumption level in Q4 2019 is set at 100%, private consumption in Q4 last year was at 93.4%, still below the pre-COVID-19 level. Director Park said, "Especially since face-to-face consumption is shrinking significantly more than non-face-to-face (untact) consumption, it is difficult to say that the impact of COVID-19 has been overcome."

Meanwhile, the Bank of Korea expects this year's growth rate to reach 3.0%, higher than the trend growth rate (in the low 2.0% range). However, since last year’s growth was negative due to the COVID-19 shock, the Bank of Korea stated that it is difficult to say that a rapid recovery is underway just because this year's growth rate exceeds the trend growth rate. Director Park emphasized, "While the shock to goods consumption was not greatly affected by the third wave of COVID-19, face-to-face service consumption such as accommodation, entertainment, and transportation has continued to worsen," adding, "Although the entire population is suffering from COVID-19, the pain of vulnerable groups is intensifying, so policy authorities are expected to pay close attention to this area when implementing policies."

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