COVID-19 flare-up corners BOK to lower growth forecast

Two public servants from Songpa District Office put up notices on the wall of a karaoke bar in Seoul, Aug. 19. The government banned large gatherings at 12 high-risk indoor facilities including clubs, pubs, karaokes, and workout rooms to prevent further spread of COVID-19. Korea Times file

1-percent contraction precarious amid weak export, consumption

By Lee Kyung-min

The Bank of Korea (BOK) is very likely to cut its economic forecast for 2020 from 0.2 percent growth to as low as a mid- to low-1 percent contraction mostly due to a new mass outbreak of COVID-19 infections here.

The number of new confirmed cases nationwide has shot up over the past week ranging from a daily 197, Aug. 16 to 397, Aug. 22, after reports of a mass infection among participants of street rallies and religious gatherings in downtown Seoul.

The worse-than-expected outlook is increasingly becoming a reality given the continuing surge in numbers of new confirmed cases in Korea could lead to a third round of stricter social distancing regulations. These would further burden the government's efforts to bolster consumption needed for a rebound of the flagging economy. Cheong Wa Dae and the ruling Democratic Party of Korea (DPK) are “seriously reviewing” upgrading the level to the highest Level 3, sometime this week, according to sources familiar with the issue, Sunday.

Also advancing is the fear of soaring default rate, a major concern for commercial lenders and the financial authorities alike in a worrisome scenario whereby systemic financial risk is rapidly amplified by many hard-hit small- and medium-sized enterprises (SMEs) declaring an outright default following a plunge in sales.

The relevant units under the central bank are conducting repeated revisions of its economic forecast ahead of a scheduled press briefing, Aug. 27.

At issue is how much of an adjustment should be made to a 0.2 percent year-on-year contraction projected in May, an assessment premised on a slow-yet-steady decline of COVID-19 numbers in the latter half of 2020.

Experts say the worse-than-feared development in the pandemic situation since May will delay recovery in global trade, in a major blow to the export-reliant economy putting a substantial dent in the country's GDP.

“The central bank will have little option other than to significantly lower the forecast,” Seoul National University economist Kim So-young said. “But it wouldn't want to revise down the figure too much to warrant a change in the already record-low key policy rate, so the numbers won't be too drastic.”

The 1 percent contraction is regarded as a tall order, unless backed by at least 1.8 percent quarter-on-quarter growth in the July-September and October-December periods. Providing a rationale for cautious optimism is exports, which saw a steep drop of 25.5 percent in April, year-on-year, but have since shown signs of recovery to a less severe 7 percent drop in July.

But the intensity of the possible rebound will hinge on private consumption. The economy saw a 1.4 percent growth in consumption in the second quarter, mostly due to government assistance of up to 1 million won ($840) in cash-equivalent emergency relief funding given to individuals and families.

The government is likely to now seek a second round of consumption-bolstering relief measures but whether or not the private sector will report robust growth remains to be seen.