COVID-19, rate hikes to hamper economic recovery in 2022

High vaccination rate, medical capacity expansion may offset risks to GDP growth: experts

By Lee Min-hyung

The resurgence of COVID-19 and additional rate hikes are expected to pose major downside risks to the Korean economy in 2022, putting a drag on a long-awaited economic recovery, economists here and abroad told The Korea Times in interviews marking the arrival of the new year.

Previously, there had been a wave of optimism for a solid recovery next year following the predicted end of the pandemic. But reviving fears stoked by the relentless spread of the coronavirus and its variants are dimming the outlook for robust economic growth here, they said.

In 2021, the Korean economy is forecast to achieve 4-percent GDP growth on a quick rebound of manufacturing exports ― such as computer chips and petrochemical products ― according to the Bank of Korea (BOK). The growth forecast is in line with the recovery momentum of the global economy after a recession that lasted more than a year due to the shock of the pandemic outbreak in 2020.

But as the base effect on the side of exports is expected to weaken throughout 2022, a possible recovery in domestic consumption holds the key to determining whether the Korean economy will be able to continue a modest level of growth, according to an economist at KB Financial Group Research Institute.

“The key focus that will drive the economic recovery here in 2022 should be on domestic consumption,” said Lee Seung-hoon, a senior economist at the institute. “But the economy is still vulnerable to two major risks: the resurgence of the COVID-19 pandemic and key rate hikes.”

The economy is also feared to fall into another downturn due to the Omicron variant and breakthrough coronavirus infections, according to the economist.

The Korean government has reinforced social distancing measures only a few weeks after easing restrictions in early November. The decision came in response to a surge in infection cases soon after the country joined the global bandwagon with its attempted “Living with COVID-19” scheme.

“Chances are that the COVID-19 resurgence brings about a sharp decline in global asset prices, a delay in recovery of face-to-face consumption and an increase in the number of the self-employed teetering on the verge of insolvency,” he said.

From left are KB Financial Group Research Institute economist Lee Seung-hoon, Mirae Asset Securities' global asset allocation team head Park Hee-chan, Moody's Analytics economist Dave Chia, Oxford Economics economist Lloyd Chan and Fitch Ratings Director Jeremy Zook. Courtesy of each firm

The fear comes at a critical time when major economies around the globe are normalizing their monetary policies to deal with rising inflation woes. The U.S. Federal Reserve is also set to put an end to its years-long near-zero key rate policy as early as the first half of 2022.

The BOK also took preemptive steps by raising the key rate twice in 2021. The general consensus is that the Korean central bank will increase it once more in January or February to control the strong inflationary pressure here.

With major developed countries entering the cycle of rapid monetary tightening next year, this situation may spark a double-dip recession in Korea and other emerging economies, as households are less likely to increase spending due to the escalating interest burden, according to the economist.

For these reasons, KB offered a less optimistic outlook on Korea's 2022 GDP growth, with a forecast of 2.8 percent.

Despite the uncertainties, a group of global economic institutions and the BOK maintained rosy outlooks on the local economy. The BOK maintained its earlier forecast of Korea's 2022 GDP growth at 3 percent, and the International Monetary Fund expected the economy to grow 3.3 percent next year.

Mirae Asset Securities, the nation's largest securities firm, however, presented a forecast that is on a par with that of KB.

“We cannot rule out the possibility of the economy topping 3-percent growth next year, but our view is that export momentum will weaken in line with the global economic slowdown,” said Park Hee-chan, head of Mirae Asset Securities' global asset allocation team.

He also remained pessimistic over a possible rebound of domestic consumption, due to weak employment figures.

“Our research center forecasts the Korean economy to achieve 2.8-percent growth next year, and the target figure is also under a downward risk.”

The executive also played down the impact of China's economic slowdown.

“Even if China's economy shows sluggish growth, we do not expect the China factor to have a game-changing impact on Korea's GDP growth,” he said. “With China's Xi Jinping administration presenting a set of new stimulus policies, our view is that this situation will have a positive impact on the Korean economy.”

Optimism over high vaccination rate

Despite the overall pessimism of local economists, overseas experts forecast that the BOK's GDP growth target of 3 percent next year is “still within reach” due to the country's high vaccination rate.

“The Omicron variant and future variants are not forecast to derail Korea's economic expansion,” said Dave Chia, an economist at Moody's Analytics.

“The emergence of new variants is not surprising, and new virus waves are expected. With Korea's high vaccination rate, increasing booster shots and expansion of medical capacity, future virus waves are expected to place lesser strain on its overall healthcare system.”

More than 82.5 percent of Korean adults have so far been double-jabbed with COVID-19 vaccines, according to the Korea Disease Control and Prevention Agency.

The Moody's economist also expected Korea's exports to continue reporting solid gains on chip price increases.

“The 3-percent target for 2022 GDP growth is achievable, as we remain optimistic on Korea's economic expansion through 2022 on the back of its robust export gains,” he said. “The global chip shortage will keep chip prices elevated next year, benefiting Korea's trade position. Even as downside risks from the pandemic remain elevated, a strong recovery of domestic demand is still within sight, as the Korean economy is expected to continue reopening in 2022.”

Oxford Economics also remained rosy in its outlook on the Korean economy for similar reasons.

“While the recent domestic COVID-19 resurgence is a setback and some activity restrictions have been reimposed, we still expect private consumption to continue its recovery,” Oxford Economics economist Lloyd Chan said.

This expectation is because activity restrictions are still less stringent than before the shift to the “Living with COVID-19” strategy in November, while high vaccination rates in Korea will offer residents at least some protection and may help prevent the healthcare system from being completely overwhelmed, according to Chan.

The economist also expected the Omicron variant to have only a limited impact on the economy, as the government has introduced only a “moderate” set of restrictions, even if it has yet to be known how serious the new variant is.

“For now, we assume there will be a moderate reimposition of some restrictions on activity, most notably on foreign travel, and some resulting disruptions to supply chains,” he said. “This will dampen growth in the first quarter of 2022, but we expect the lost activity to be made up in the second and third quarters of 2022.”

Fitch Ratings expected the Korean economy to continue to be exposed to downside risks from the pandemic next year.

“Our baseline expectation is for private consumption in Korea to further recover and support growth in 2022, as social distancing measures are eased and households have greater confidence to return to face-to-face service consumption,” Fitch Ratings Director Jeremy Zook said.

“However, as we have just seen with Korea's latest COVID-19 wave in December, when social distancing measures were tightened again, downside risks to the economy from the pandemic will likely persist over the next year,” he said.