Value context and insight. lkm@koreatimes.co.kr
Specter of 'double-dip' recession looming large
A street in Myeongdong, a popular tourist and shopping district in Seoul, is quiet due to the impact of the spread of coronavirus, Aug. 6. Yonhap
By Lee Kyung-min
'Economy likely to contract in Q3 if strictest social distancing remains intact'
By Lee Kyung-min
Fears are growing that Korea will slip back into a recession, as the nation's economy is likely to contract in the third quarter of the year due to the COVID-19 situation spinning out of control amid a disruption in the supply of vaccines.
The Korea Disease Control and Prevention Agency reported a record high 2,223 cases for the country Wednesday, a day after Moderna stated that shipments of its vaccine to Korea for August would be more than halved.
The fourth wave of the coronavirus is highly likely to dampen private spending and corporate investment, sending Asia's fourth-largest economy into a “double-dip” recession, meaning a second economic slowdown following a short-lived recovery.
Exports, the lone growth engine for Asia's fourth-largest economy over the past few months, are also expected to lose steam due to slow global trade amid the resurgence of the worldwide pandemic.
Korea's gross domestic product (GDP) grew 0.7 percent in the second quarter from the previous one, the fourth consecutive expansion since the third quarter of 2020, after it contracted 3.2 percent in the second quarter and 1.3 percent in the first of last year.
The Bank of Korea (BOK) had said previously that the economy could grow 4 percent this year, lifted by 0.7 percent quarter-on-quarter growth in the April to June period with consumer sentiment remaining solid despite the fourth wave of COVID-19.
However, the rosy outlook was premised on the economy registering an average of 0.7 percent quarter-on-quarter growth for the rest of the year. Should third quarter growth slow to 0.5 percent, the economy must register 1.1 percent growth or greater from October to December to meet the BOK forecast.
“The view of 0.7 percent growth in the third quarter is a stretch,” said Seoul National University economist Lee In-ho.
The central bank's view that spending will not be adversely affected any more than previously expected is “out of touch” with reality, in Lee's view, because it has failed to factor in the hardship experienced by small businesses and low-income earners.
“The bank said the consumer reaction will be limited as people have learned not to panic over the past year. But as equally crucial as consumer sentiment is the fact that a vulnerable group of people and certain industries are barely getting by,” he said. “The economy is likely to contract, if the current social distancing rules remain for the next few weeks.”
The real economy is showing clear signs of a steeper decline, as illustrated by monthly unemployment insurance payouts registering over 1 trillion won for the sixth consecutive month in July.
According to Statistics Korea data, Korea added 542,000 jobs in July, but job growth slowed for the third straight month due to the pandemic. In particular, the hospitality industry shed 12,000 jobs and retail lost 186,000.
Late credit card payments by people in their 20s jumped 15.8 percent year-on-year in the first quarter, whereas those by people in their 30s and 40s fell during the same period. People in their 50s and 60s flagged for late payments rose only slightly.
According to a report by the central bank released in June, of 2,520 companies that disclosed their business records last year, over a third, or 39.7 percent, failed to reach an operating profit large enough to cover their interest costs.
The second extra budget of about 39 trillion won ($33 billion) drafted to provide the bottom 88 percent with 250,000 won cash-equivalent credit card points and vouchers will heighten the risk of a further spread of the coronavirus, since the success of consumption-bolstering measure hinges on a greater number of people coming into contact for in-person services.
What is of more concern is that inflationary pressure is building up, with headline inflation staying above the Bank of Korea's price stabilization target of 2 percent for the fourth consecutive month.
A total of 141 frequently purchased items, including groceries, logged a 3.4 percent year-on-year price increase in July, with core inflation ― excluding volatile food and energy costs ― inching up 1.7 percent, continuing the uptrend that began in mid-2020.
The prices of key daily necessities have been rising, since the price of crude oil and raw materials soared without corresponding increase in demand. Examples include the costs of dining out, public transport, gas, housing, agricultural produce and industrial products. Exports might suffer if the continued COVID-19 spread virus leads to a sharp decrease in demand for goods and services.