Virus resurgence stokes fears of double-dip recession

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By Kim Bo-eun

Fears are mounting that the Korean economy will slip into a double-dip recession, as its recovery momentum is losing steam fast with the latest resurgence of COVID-19 dampening economic activities here and abroad.

To make matters worse, the country is experiencing an unprecedentedly long monsoon season, which has damaged the agricultural and construction industries.

Experts warn that Korea, which has suffered an economic contraction in the first two quarters, may only see a slight recovery in the third quarter and suffer another dip, resulting in a W-shaped economic recession.

Korea saw its economy contract by 1.3 percent in the first quarter and by 3.3 percent in the second on a quarter-on-quarter basis amid the spread of the coronavirus pandemic both here and abroad. Major indices began improving in July as infection rates came under control.

"If we see a slight rebound in the third quarter, we may see a W-shape recession, and if we are unable to see any rebound in the third quarter this may result in an L-shaped recession," said Standard Chartered Bank Korea Chief Economist Park Chong-hoon.

"Indices for July were not bad, and we have started to see a resurgence in mid-August. August and September will prove to be crucial months," he said.

The resurgence attributed to mass protests Aug. 15 and church gatherings, has dampened the prospects of a V-shaped recovery. Daily cases of new infections have averaged 290 over the past 10 days.

While the impact of the resurgence has yet to be fully seen, the authorities have signaled the economy may be derailed from its forecast growth trajectory.

The Bank of Korea (BOK) earlier predicted Korea's GDP would contract by 0.2 percent this year, based on the premise that the number of COVID-19 patients here reached its highest point in May.

However, at the National Assembly, Monday, BOK Governor Lee Ju-yeol said "We forecast that the recovery of the domestic economy will be weakened," reflecting the resurgence.

"We are seeing signs of COVID-19 spreading here again and as social distancing measures are strengthened accordingly, consumption will be negatively affected."

He said the central bank is not ruling out the possibility that Korea's economy may shrink by more than 1 percent this year.

The BOK earlier estimated Korea's economy to shrink 1.8 percent if the number of COVID-19 infections continued to rise through the third quarter of the year. It is set to present its latest GDP growth forecast Thursday.

The OECD predicted that Korea's economy would contract by 2 percent if a second shock hit the economy due to a resurgence of the coronavirus.

Korea is also set to be affected by the resurgence of COVID-19 in other parts of the world.

"Exports, in particular, are set to be affected as a resurgence of the coronavirus is being seen in other parts of the world," Hyundai Research Institute Deputy Director Joo Won said.

The research institute forecast that exports would drop by 9.2 percent this year, hit by the global economic recession and shrinking external demand. This is a worse contraction than the 5.9 percent predicted in April, year-on-year.

"The possibilities of a resurgence of COVID-19 both here and globally in the upcoming fall and winter months, when the virus is increasingly able to spread, poses an additional burden when the timing of the development of a vaccine is unclear," Joo said.

Based on the progression of the current situation surrounding the resurgence, the government may further strengthen social distancing measures. However, administration is being highly cautious about implementing a possible lockdown, as this will inevitably wreak havoc on the economy.