Korean economy will recover gradually from pandemic: OECD

In this July 11, 2019, file photo, a protester with a sign walks to attend a rally denouncing the Japanese government's decision on stopping their exports to South Korea in front of the Japanese Embassy in Seoul. AP-Yonhap

By Kim Yoo-chul

The Korean economy will recover “gradually” from the pandemic as a swift and effective policy response allowed containment of the spread of the virus, recent economic surveys released by the OECD said, Tuesday.

“Korea was able to avoid the extensive lockdowns of many other countries. Along with a range of government measures to protect households and businesses, this limited the damage to the domestic economy and output is shrinking less than in any other OECD country,” the report read.

The COVID-19 crisis has led to falls in GDP of respectively 1.3 percent and 3.3 percent in the first and second quarters of this year, quarter-on-quarter. However, the report said the contraction is much smaller than in Canada and the United States. While it's true that the virus crisis has hit employment hard, Korea was affected less severely than most other countries.

Specifically, the report predicted the economy, Asia's fourth-largest, will contract 0.8 percent this year from a year earlier. The revised view compared to an earlier forecast of a 1.2 percent contraction in June and the highest growth expectation among 37 OECD member countries.

The report also highlighted the Bank of Korea's (BOK) role in terms of managing monetary policy as the report suggests inflation has remained below the 2 percent target thanks to a series of measures to provide liquidity by cutting its policy rates.

“If low inflation and sluggish activity persist longer than expected, further monetary policy accommodation needs to be considered. Because little space is left for further policy rate cuts, the BOK should stand ready to adopt unconventional monetary policy measures going beyond liquidity support, like the purchase of government bonds to lower long-term interest rates,” according to the report.

The analysis also credited the government's efforts to stimulate the economy by providing additional fiscal support.

“Government debt was less than 40 percent in 2019, lower than in all G7 countries and far below the OECD average of over 100 percent. Sound public finances provide room to increase spending in the current downturn, even though the medium-term implications should be monitored carefully, especially when permanent spending measures are implemented,” it said adding household credit growth slowed following the introduction of a debt service ratio limit in 2018 and a tightening of regulations for non-bank financial institutions since 2017.

Regarding the soaring housing prices in the country, OECD said real housing prices have been stable at the national level thanks to more responsive supply than in most OECD countries and a “prudent” financial policy. The report mentioned rising housing prices in some parts of the Seoul metropolitan area and the provinces but it didn't provide the OECD's views on housing price increases in these regions.

The report recommended the government make better use of human resources and innovation to ensure continued economic growth.

“Korea's employment rate is relatively low, even before the COVID-19 crisis, largely reflecting low female employment, although the delayed labor market entry of youth also contributes. Employment of older workers is high, but often concentrated in low-paid, low productivity jobs. Working time is among the highest in the OECD, but labor productivity is low. Policies should aim at raising employment and productivity, while promoting better work-life balance,” it added.