Pandemic engulfs world economy

Korea should brace for global recession

By Kim Bo-eun

The rapid spread of COVID-19 has engulfed the world economy paralyzing economic activities in every industry, fanning worries that the world is slipping into a recession.

Given that the world has become an interconnected economic village over the past decade as a result of globalization, the pandemic of the new coronavirus is expected to wreak havoc on the entire world ― exports, investment and consumption.

Korea seems to be on worse footing than any other country as its economy is facing daunting internal and external conditions worsened by the spreading coronavirus. Against this backdrop, calls are growing that the government should brace for an economic storm by employing all possible options.

China's slowdown, based on the virus' outbreak on the mainland that has reduced production in the first two months of the year, is set to take a heavy toll on Korea as China is its largest trade partner.

Concerns over a possible “hard landing” in China is growing as combined data for January and February shows industrial production, retail sales and asset investments all declined by double digits ― 13.5 percent, 20.5 percent and 24.5 percent, respectively.

These are China's first declines on record, and have triggered zero growth outlooks for the world's second largest economy for the first quarter of this year.

The rapid spread of the coronavirus in the U.S. and Europe is set to scale up the magnitude of damage on the global economy and cause severe ripple effects.

The plunge in oil prices based on collapsing demand could lead to widespread bankruptcies in the U.S. energy industry, resulting in thousands of jobs in the sector to be lost.

Italian and German manufacturers were already largely exposed to the U.S.-China trade conflict that escalated last year, seeing their growth hurt by the conflict. With the pandemic, they are set to suffer further.

The coronavirus death toll in Italy has surpassed 2,500 and an emergency decree that will spend $28 billion is estimated to bring the country's deficit to at least around 4 percent of domestic product this year.

Italy's economy was already weak before the country became home to the worst outbreak of the virus in Europe. It posted a quarterly contraction of 0.3 percent in the last three months of 2019.

The likelihood of a global recession looms, as global debt has grown in the world of ultra-low interest rates.

Analysts say the world's debt situation is much worse now than it was at the time of the economic crisis in 2008, with $19 trillion piled up in risky corporate debt.

“We were overdue for a recession,” Mauro Guillen, professor of international management at the Wharton School, told The Korea Times in an email.

Park Chong-hoon, chief economist at Standard Chartered (SC) Bank Korea said, “We have revised our outlooks this week, downgrading China's growth forecast for this year to 4 percent. The coronavirus situation in China is stabilizing but the U.S. is getting started. We expect second-quarter growth in the U.S. and Europe to be shaken, which creates conditions for a global recession.”

Park Jae-ha, senior economist at the Korea Institute of Finance (KIF) echoed the pessimistic view, saying, “All industries will be affected by the coronavirus; damage is already happening and may grow further.”

Growing bankruptcies

Domestically, the coronavirus is posing a grave threat to the self-employed in restaurant or travel-related businesses.

This comes on top of record household debts that surpassed 1,600 trillion won last year. Household loans spiked by more than 9 trillion won last month.

Manufacturers, on falling export demand, are taking measures for temporary shutdowns and are accepting early retirement.

What is more worrisome is that the number of bankruptcies filed by local businesses and individuals are surging due to the economic fallout from the virus.

According to data from the Supreme Court, the number of bankruptcies filed with the courts in February by individuals was 3,741, up 19.2 percent from a year earlier. Those filed by corporate entities reached 80, up 12.6 percent.

“We have set Korea's growth forecast for this year at 1.8 percent but this is set to be revised downward,” Park of SC Bank said.

Guillen noted a global recession could cause an exodus of global funds from emerging markets, including Korea.

KIF's Park said the circumstances triggered by the coronavirus could present lessons for economies to lessen the extent of possible shocks in the future.