[Q&A] Bank of Korea: "Recovery speed is not fast... COVID-19 situation is not calming down"

On the 26th, the Bank of Korea Announces '2020 Q4 and Annual Real Gross Domestic Product (GDP) Preliminary Report'

[Asia Economy Reporters Eunbyul Kim and Sehee Jang] Park Yang-su, Director of the Economic Statistics Bureau at the Bank of Korea, stated on the 26th, "Generally, if the growth rate exceeds the trend growth rate (low 2% range), it can be considered a recovery. This year’s growth rate is forecasted at 3%, which is higher than the trend growth rate, but since last year’s growth rate was negative, it is difficult to say the recovery speed is very fast."

Director Park made these remarks while announcing the '2020 Q4 and Annual Real Gross Domestic Product (GDP) Preliminary Report.' He added, "Since COVID-19 has not been completely contained, we need to approach the situation cautiously."

According to the GDP preliminary figures released by the Bank of Korea on the same day, last year’s economic growth rate was -1.0%, marking the first negative growth since the 1998 financial crisis (-5.1%). The economy recorded negative growth in Q1 (-1.3%) and Q2 (-3.2%) last year, then showed signs of recovery starting from Q3 (2.1%).

Below is a Q&A with Director Park.

▲ What is the reason for the upward revision of the annual growth rate compared to the Bank of Korea’s initial annual forecast of -1.1%?

= The annual growth rate was revised upward because the Q4 growth rate came out higher than expected. Exports, centered on semiconductors and chemical products, showed strong performance. Government investment, mainly in construction, also increased. The Q4 growth rate of 1.1% being better than expected appears to have influenced this.

▲ The annual real Gross Domestic Income (GDI) recorded a negative figure again last year. What is the meaning and reason for this? How does the deterioration of terms of trade affect our economy?

= Real GNI represents our purchasing power, and when terms of trade worsen, purchasing power decreases. Export prices fell while import prices did not, weakening external purchasing power. Due to the pandemic, international oil prices and others dropped, causing real GNI to be higher than real GDP.

▲ Approximately what is the per capita GDI in dollar terms?

= Considering exchange rates, it is expected to be in the mid-$31,000 range. The exact figure is unknown as the GDP deflator has not yet been released. Last year, it was in the mid-$32,000 range, but this year, the won-dollar exchange rate rose about 1.2%, lowering the dollar-based amount.

▲ The annual growth rate had been on a downward trend even before COVID-19. How do you evaluate this?

= Our economy experienced an investment adjustment period in 2018 and 2019, recording growth rates of 2.9% and 2.0%, respectively, showing a downward trend. From Q4 2019, growth momentum seemed to revive in the private sector, but the outbreak of COVID-19 last year caused economic contraction. The previous two years were affected by cyclical factors, while last year was impacted by an external shock.

▲ The Q4 growth rate exceeded expectations. Can we say our economy is on a recovery track?

= The term "recovery" implies growth exceeding the trend growth rate (around 2%), but since last year was negative, it is difficult to say the recovery speed is very fast. COVID-19 has not yet been fully contained, so we need to approach cautiously.

▲ What was the contribution of government consumption to growth last year?

= The total government contribution last year was 1 percentage point, with government consumption contributing about 0.8 percentage points. The private sector’s contribution was -2 percentage points. As the economy sharply deteriorated and private consumption contracted significantly, the government sector played a role, resulting in this outcome. Other countries also show higher government contributions compared to the private sector, and although official figures are not yet available, their contributions are expected to be even higher than ours.

▲ It is said that the third COVID-19 shock was greater than the first and second. How much did it affect the Q4 growth rate? How much impact is expected in Q1?

= Private consumption was hit hardest by the third wave compared to the first and second. Q4 private consumption fell to about 94% compared to Q4 2019, the pre-COVID baseline, while Q1 was at 94% and Q3, during the second wave, was at 95%. The third wave had little effect on goods consumption but severely worsened face-to-face service consumption due to strengthened quarantine measures. Policymakers need to consider the increased hardship on vulnerable groups and carefully manage policies. It is still difficult to predict future prospects.

▲ Despite economic contraction, facility investment turned positive last year. What were the reasons?

= Facility investment turned positive last year due to the base effect from the adjustment period in facility and construction investment in 2018 and 2019. Despite the COVID-19 situation, machinery investment in semiconductors and displays increased significantly. This proactive response is expected to have a positive effect when the semiconductor market recovers.

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